Warnings about rates may have driven homeowners to lock in mortgages

The Bank of Canada’s warnings about coming interest rate hikes may already be reaping benefits, including changing the behaviour of consumers, governor Mark Carney says.

The central banker says in a speech about the advantages of signalling future intentions — and its limitations — that his persistent warnings about future interest rate hikes may be influencing the types of mortgages homebuyers are acquiring.

He noted that the share of fixed-rate mortgages has almost doubled to 90 per cent this year, with a corresponding decline in variable-rate mortgages.

The central bank has not deviated from the one-per-cent policy rate since September 2010, but in the past year has warned that its next move — whenever it comes — will most likely result in higher rates.

“Our guidance indicates that some policy action may be necessary, encouraging a degree of prudence in household borrowing,” Carney said in the speech to Toronto financial analysts.

“The share of new fixed-rate mortgages has almost doubled to 90 per cent this year, reflecting the combination of attractively priced fixed-rate mortgages and the tightening bias of the Bank of Canada.”

Carney’s reasoning is that the more transparent a bank is about its future intentions, the more likely players in the economy will act according to expectations.

But, the guidance only works if a central bank is credible, he points out.

And that’s where too much transparency can also be a bad thing, because a central bank’s guidance is not a “promise.” Central banks have to adjust to whatever the economy throws at them.

The speech, which likely serves as a notice as to how Carney intends to conduct monetary policy in his new job at the Bank of England next summer, argues that the need for alerting markets about future intentions rises with the level of crisis in an economy.

In extraordinary times, which is likely how he views the situation in the United Kingdom, Carney says a central bank may want to expand the level of guidance — as he did in April 2009 in announcing he intended to keep the policy rate at the “zero lower bound” (0.25 per cent) until the second quarter of 2010.

In effect, he said, the central bank substituted certainty and duration for reducing the policy rate, something it couldn’t do because it was already as low as it could go.

“The bank’s conditional commitment succeeded in changing market expectations of the future path of interest rates, providing the desired stimulus and thereby underpinning a rebound in growth and inflation in Canada,” he said.

He notes that the U.S. has gone even further by pledging to keep its policy rate unchanged until mid-2015.

And at the zero bound — when rates can’t be cut further — Carney says central banks may even want to tie future action to specific levels of economic growth. But he warns there is a danger to such clarity in an uncertain environment.

Unlike targeting rates for inflation, a central bank would have to make up for “misses,” which could send confusing signals to markets.

“However, when policy rates are stuck at the zero lower bound, there could be a more favourable case for (growth) targeting,” he said. “The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand.”