An interesting article today about the possibility of an interest rate rebound. Not sure I agree entirely with some of the opinion in it, but I always try to be objective about this sort of thing.
House market bubble could bring quick end to low interest rates
By Julian Beltrame (CP) – 11 hours ago
OTTAWA — The Bank of Canada's efforts to spark a rebound in the domestic housing market may be working too well.
A new TD Bank report shows house sales and prices have defied gravity during the severe economic recession and are poised to end 2009 at higher levels than they were before the downturn hit Canada last fall.
Economists credit the central bank's policy of slashing interest rates the past year with reviving a dormant housing market - perhaps too much, too fast - leading to speculation that bank governor Mark Carney may have to reverse course and raise rates earlier than expected.
"We're not calling what we see presently a housing asset bubble," says TD economist Grant Bishop,
"We think it will moderate, but should it fail to moderate, it will no doubt be concerning to the bank."
Talk about exit strategies as the global economy improves has been building for months, particularly since most governments have ramped up spending beyond comfort levels and central banks have cut rates to the bone. Low interest rates, along with a loosening of controls, is largely blamed for the U.S. housing bubble earlier this decade that eventually triggering the global financial crisis.
U.S. Fed officials have recently begun to speculate about the proper time to raise the policy rate from zero, and European Central Bank policy-makers have also sounded more hawkish on interest rates.
On Tuesday, Australia went beyond talk by increasing the policy rate by a quarter point to 3.25 per cent, citing rising home prices in that country as a key concern.
Australia benefits from a resources-based economy that ships many of its products to China, Japan and other Asian countries.
The Bank of Canada has issued what it calls a conditional commitment not to raise its policy rate of 0.25 per cent - the lowest practical level - until at least July, but last week Carney went out his way to stress the pledge had plenty of conditions.
Devoting three paragraphs on the subject in a speech in Victoria, Carney concluded the section by stressing: "In short, it is an expectation, not a promise. If circumstances affecting the outlook for inflation change materially, the conditional commitment would change."
In Europe, the two leading central banks are expected to keep interest rates unchanged Thursday and damp down any talk that borrowing costs will soon rise in the wake of the move by Australia's central bank to lift rates.
Analysts say the European Central Bank, which controls monetary policy for the 16 countries that use the euro, and Britain's Bank of England will keep benchmark interest rates unchanged at historic lows of one per cent and half a per cent.
Unlike Australia, the eurozone and British economies remain in recession, though upcoming figures may show a modest pickup in growth over the final months of 2009.
'We continue to believe the ECB remains very comfortable with notions of keeping the policy rate at a low level for a prolonged period of time," said Royal Bank of Scotland economist Silvio Peruzzo.
'However, the rhetoric is likely to turn gradually more hawkish in recognition of the macroeconomic outlook, which is evolving more positively than the ECB expected," he added.
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