Did the Bank of Canada mislead borrowers on low interest rates?

Many Canadians who took on mortgages in 2020 are now experiencing financial strain. Who's to blame?

Did the Bank of Canada mislead borrowers on low interest rates?

Activity in Canada’s housing market had already shot through the roof at the onset of the COVID-19 pandemic – and on November 26, 2020, the governor of the Bank of Canada delivered the words that seemed to light the touchpaper for further borrowing.

Speaking to the House of Commons standing committee on finance, Tiff Macklem addressed the issue of rock-bottom interest rates, which had spurred a homebuying boom across the country, head on. “We want to be very clear,” he said. “Canadians can be confident that borrowing costs are going to remain very low for a very long time.”

Macklem described inflation – sitting the previous month at 0.7% – as “unusually weak,” indicating that the Bank expected it to increase gradually, but remain at less than 2%, entering into 2023.

Those comments could hardly appear less prescient just over two years down the road. On January 25, 2023, the central bank announced an eighth consecutive hike to its benchmark rate, with a quarter-point increase meaning the rate had now spiked by 4.25% since the prior March alone.

The Bank has embarked on that aggressive series of hikes in an effort to tackle an inflationary crisis that saw annual price growth hit its highest level in nearly 40 years last summer.

That’s caused acute financial pain for scores of Canadians who took out variable-rate mortgages at the height of the record-low-rate environment but have now seen monthly payments balloon upwards after the Bank of Canada’s flurry of rate increases.

“A regrettable statement with hindsight”

Could Macklem have used more cautious language in setting the scene for a prolonged era of low interest rates? BMO Capital Markets managing director, Canadian rates and macro strategist Benjamin Reitzes (pictured top) described those November remarks as “a regrettable statement with hindsight” although it may at that point have been difficult to envisage the economic storm ahead.

“At the time, we were coming off of a decade of very low inflation, very low interest rates, and central banks that struggled to stimulate growth and stimulate inflation,” he told Canadian Mortgage Professional.

“And you saw this pandemic come and the potential growth shock there was unbelievably large. He knew it was big, [but] he didn’t know how big, he didn’t know how long it would last. And so central bankers… thought they had to do as much as possible, and one of the ways to do that is with language, with forward guidance.”

Still, Reitzes said the sharp rebound in inflation that’s been witnessed particularly over the last 12 months appeared a distant prospect at the time of Macklem’s comments.

That crisis was compounded by two unforeseen factors, according to Benjamin Tal (pictured below), deputy chief economist at CIBC World Markets: the emergence of the Omicron COVID-19 variant, which wreaked havoc on the national and global economies, and Russia’s invasion of Ukraine at the end of February last year.

“I think you cannot blame the Bank, because inflation was unexpected,” Tal told CMP. “We have two things that they didn’t expect: one is Omicron, the other is Russia. Those were not in the system.

“So in retrospect, they should have started earlier [in their cycle of rate hikes] – but again, there was no way of knowing the inflationary impact, so it’s very difficult to blame the Bank of Canada at this point.”

That said, it will be little comfort for Canadians who are struggling with their mortgages to hear their central bank had little choice in the matter, RateHub.ca’s co-CEO and co-founder James Laird (pictured below) said.

Borrowers are entitled to feel somewhat misled by the Bank, he added, on its confidence that rates would remain resolutely low for the foreseeable future.

“It’s not like they were mute on the subject,” Laird said of the Bank. “They provided extraordinary forward guidance which they didn’t stick to. What else are Canadians supposed to do other than believe their central bank?

“If you bought a home at your peak prices and now you believe the Bank statements… I think [for] that person, there’s nothing they can really do about it, but I think it’s pretty valid to feel aggrieved in that situation.”

Did the Bank of Canada have any option except rate hikes?

Leah Zlatkin (pictured below), mortgage broker and chief operating officer at Mortgage Outlet, said that the Bank of Canada was essentially the best source of information for mortgage professionals on the future economic landscape – although she emphasized the importance of letting clients make a judgement call themselves.

“When you hear somebody say something like [Macklem’s comments on low rates], and then you turn around and tell all of your clients the same thing that you’ve just heard and you tell people how to engage in the next year of their life based off of the information you were provided, that, you feel, comes from a very sound source,” she said.

“When I have a conversation with someone, I’ll tell them, ‘This is based on the information I have at hand. This is what I’m doing for myself, but you need to make your own decision based on what you feel comfortable with.’”

While the Bank may have put many agents, brokers, and their clients in a precarious position by reversing course on that message, Zlatkin added, there appeared no alternative to that abrupt about-face.

“I don’t think they had any other options,” she explained. “Do I think they should have raised interest rates harder and faster, and then maybe we wouldn’t have been in the situation that we’re in right now? Perhaps, but it’s all relative.”

The Bank’s response

Asked for comment on how it viewed Macklem’s 2020 remarks in hindsight, the Bank of Canada referred CMP to an interview the governor gave to CTV’s Joyce Napier on the day of its most recent rate hike.

“Particularly for Canadians who bought houses at the peak, they took out a variable-rate mortgage, they are being really squeezed by these higher interest rates,” Macklem said in that interview. “The higher interest rates have fed through to higher interest payments very quickly.

“Most Canadians have five-year mortgages. As they renew those mortgages, yes, they will be renewing at higher rates. What that means, to be frank, is that they’re going to have less money left over to buy other things.”

Still, Macklem reiterated the Bank’s view of the hikes as one of the most effective tools to bring inflation back under control.

“Unfortunately, that’s how monetary policy works,” he said. “That’s part of the process that will slow spending in the economy and that’ll give supply the opportunity to catch up, and that will relieve the price pressures.

“Once we get inflation down, we can resume sustainable growth and things can get back to normal. Inflation’s not going to fade away by itself.”

One thing is for sure, according to Reitzes – whichever way blame lies for the struggles currently facing many Canadian borrowers, the Bank of Canada is likely to be more careful in its use of language in future remarks.

“It’s unfortunate, but it’s hard to really put that much blame on [Macklem],” Reitzes said. “But I suspect they’ll be a little more judicious with the way they use their forward guidance in the future.”