Over the last week there’s been a shift in tone at the Bank of Canada. The loonie is up, but could that mean mortgage rates are on the rise sooner than we thought? Brian DePratto, Senior Economist, TD Bank, talks to Sara D’Elia about how the outlook for Canadian economic growth, the value of the loonie, and interest rates have changed over the last week. The TD Economics Quarterly Economic Forecast is available here.
There's been a shift at the Bank of Canada and we've seen the Loonie Rally, but it could also mean a rise to your mortgage rate. Joining me to explain is Brian DePratto, senior economist at TD Economics. Thanks for joining me.
Happy to be here.
So walk us through what's happened over the last week. There's been two sides of things. One is that growth has been quite strong. But really the big thing in the last week has been the change in communications from the Bank of Canada.
Up until this week, we saw a little bit of a shift away from the sort of dovish, low rates kind of communication. On Monday, Senior Deputy Governor Carolyn Wilkins spoke. And she gave very much a hawkish speech characterizing the oil adjustment as over, as the interest rates right now as extraordinarily low, maybe not necessary anymore-- really pointing to an end of the low rate policy. And to top it off, on Tuesday, Governor Poloz at the Bank of Canada had a radio interview where he was even more explicit, saying that households should be getting ready and thinking about the impact of higher rates on their balance sheet.
By central bank terms, this is about as explicit as it gets.
In terms of those household debt levels, we received some new data this week showing that the debt to income ratio is 167, meaning for every $1.67 in debt you have, you have $1 in income. What do you think that does to their outlook or potential rate moves going forward?
I do think it tempers it a little bit. And we don't expect them to make a super aggressive increase in policy. Maybe one or two hikes a year. Very gradual. But at the same time, I think there's a stability perspective here-- a little bit of a reminder for people that piling on the debt isn't a long-term viable strategy-- that rates can go up.
And they've got a little bit of leeway. A lot of that debt, of course, is mortgage debt. And here in Canada, that five-year mortgage is that popular product. So even as they go up, it's not as if every single rate at every household is going to go up at the same time.
It's going to be gradual.
It's going to be gradual.
So in terms of your team's outlook, you've made two big changes. What are those changes?
One is we've really bumped up the growth outlook. So we've had a very robust start to the year. And all the economic indicators are pointing to good momentum through the middle of the year as well. So we think growth will come in just a little bit below 3%-- around 2.8%. And that would be about the strongest growth we've seen in about six years. So very solid there.
And that really helped us sort of move the Bank of Canada forward. Take that together with the comments that we already spoke about, and that's the second part of the change is we now expect the Bank of Canada to begin tightening rates in October of this year, rather than early next year. So a bit of a shift there as well.
And do those changes have any impact in terms of what you're thinking for the loonie?
Oh, absolutely. We already saw some of this reflected in moves this week. And we think that's something that's going to persist. So we see the loonie closing out the year closer to $0.77. So a little bit stronger than maybe you would have expected previously, but not inconsistent with the change in tone and certainly the growth that we're seeing here in Canada.
Thank you very much.