Finance Minister Joe Oliver says he will not intervene or seek to reverse the Bank of Montreal’s half-point cut to its key mortgage rate, calling it a “private” decision to drop the fixed, five-year setting to 2.99 per cent.
The newly-appointed finance minister told reporters on Thursday that the possibility of super-low rates triggering a damaging housing bubble was “hypothetical” and that taxpayer exposure to defaults has been reduced following several moves by government to tighten the market.
Oliver said BMO’s chief executive Bill Downe told him of the change before the Wednesday midnight announcement, but suggested he did not attempt to talk him out of the move as his predecessor, Jim Flaherty, had done with BMO a year ago.
“There’s a market, the bank made its decision, the chief executive officer of the Bank of Montreal informed me about it, I listened to his explanation, his reasons, I reiterated … that the government is gradually reducing its involvement in the mortgage market.”
Last March, Flaherty publicly chided BMO for lowering the key five-year rate to 2.99 per cent — where the recent move took it again — warning at the time that such a super-low level could lead to a spike in mortgage acquisitions and heat up the housing market.
At the time Flaherty said he believed in “responsible lending” and that he was concerned the low rates would work against his attempts to slow the momentum in the housing market.
One of his officials also contacted Manulife last year when it announced a similar cut. A day later, Manulife reversed its decision, as did BMO.
Earlier in the day, Oliver issued a statement saying he was monitoring the situation, but also gave no hint of intervening.
“Our government has taken action in the past to reduce consumer indebtedness and the government’s exposure to the housing market. I will continue to monitor the market closely,” he said.
Analysts said BMO’s move was likely an attempt to capture a bigger portion of the mortgage action in the traditionally busy spring home-buying season.
But David Madani, chief economist of Capital Economics in Canada, said rate cuts were likely to be temporary and unlikely to cause a significant increase in activity. Bond yields have dropped in recent months but, with the U.S. economy improving and the Federal Reserve withdrawing quantitative easing, yields are projected to start rising again later this year, which should push up long-term rates, he explained.
Still, Madani said banks are playing a dangerous game and so are homebuyers who jump into the market with home prices at record levels.
“This is short-term thinking,” he said, “but it doesn’t change the long-term situation and that means the correction, when it comes, is going to be much more pronounced.”
The Bank of Canada and Flaherty have warned for years that Canadians need to prepare themselves for a time when interest rates head north, increasing the carrying costs of holding a mortgage. If home values decrease at the same time, that could have a profound impact on the economy as a whole.
There are reasons to believe Oliver won’t be as concerned this time around as household finances are in better shape today than a year ago, while home price growth and sales have moderated.
BMO spokesman Paul Deegan downplayed the timing of the bank’s rate cut and Flaherty’s departure last week.
“This rate change is driven solely by the fact that bond yields have fallen and we are in what has traditionally been the busiest season for buying a home,” he said.
Other Canadian banks have also recently cut their rates — TD Bank (TSX:TD) reduced its four-year fixed-rate mortgage to 2.97 per cent earlier this month, while Scotiabank (TSX:BNS) lowered its rates across the board while issuing a four-year special rate at 2.94 per cent.
NDP and Liberal party spokesman agreed it would have been inappropriate for Oliver to have intervened, saying the market should be allowed to function.
BMO’s five-year rate is currently the lowest among the major banks, although some discounters are offering slightly lower rates.