As US banking turmoil rumbles on, what could it mean for Canada?

Are mortgage rates set to tumble?

As US banking turmoil rumbles on, what could it mean for Canada?

The collapse of Silicon Valley Bank in the US roiled financial markets this week and triggered fears that its aftershock could spread to Canada as attention north of the border turned to the stability of domestic banks.

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), moved swiftly to step up its overview of bank lenders after the fall of SVB and schedule daily check-ins to monitor their liquidity, according to The Globe and Mail.

That news arrived shortly after OSFI’s takeover of SVB’s Canadian operations was revealed, a move that aimed to stave off market fears of a domino effect akin to the global financial meltdown of 2008-09.

Still, the dramatic developments of the past week have caused a sudden reconfiguration of expectations for central bank policy in both the US and Canada for the months ahead, with markets even beginning to eye a possible rate cut by the Bank of Canada in the near future.

How does the US banking crisis impact Canada?

Last week, Canada’s central bank announced a pause on hikes to its policy rate just a day after US Federal Reserve chair Jerome Powell indicated to the Senate banking committee that the Fed was prepared to introduce even larger rate increases than previously expected.

SVB’s toppling appeared to put a spoke in the wheels of the Fed’s plans, with market turmoil suggesting that further banks could fall and plunge the country into an unexpectedly early recession.

Odds of a US central bank March rate hike plummeted on Monday, although the Fed could still act amid persistent consumer price index growth and a recovery in bank stocks on Tuesday.

That’s significant for Canada because economists warned future divergence between the Canadian central bank and the Fed – with the former pausing rates while the other continued to hike aggressively – ran the risk of causing potentially sizeable damage to the loonie.

Last week, a big question to arise from the Bank of Canada’s dovish language compared to the Fed was whether it would be forced into pushing rates higher to avoid that scenario. But could new economic tremors from the US mean rate cuts are now on the horizon in Canada?

BoC more likely to pause than cut – for now

While the situation remains a fluid and ever-changing one, Manulife Investment Management’s director, macro strategy Dominique Lapointe (pictured top) told Canadian Mortgage Professional on Tuesday afternoon that the news from the US appeared likely to copper-fasten a pause on rate hikes by the Bank of Canada for now.

“Those events just reinforced the pause,” he said. “The pause was conditional on their outlook for lower inflation or slower growth. But I think not only the Bank of Canada but other central banks now have to consider the financial stability aspect of it, and the fact that now we’re talking about those banks with connections to the tech industry. So that’s something we haven’t seen, a blind spot.

“Are there other blind spots where at some point, the effect of past rate hikes will just show up as an event we haven’t seen and create more volatility? We don’t know. But I think that the central banks have to consider this, that maybe there was more tightening in the system than what they previously thought based on the data. So for us, in the future of the Bank of Canada, the bar to raise rates again has been placed a little higher.”

In the short term, and as of Tuesday afternoon, Lapointe said rate cuts by the Bank didn’t appear as likely as a pause, even if – as recent days have shown – events could take a sudden and dramatic turn.

“The way we lay out the scenarios so far, the cuts are not the most likely in the near term, but again if the situation gets worse, and you see financial conditions tightening a lot more in terms of the stock market, in terms of credit spread, liquidity, then I think they would have to consider it,” he said.

“But today, it seems that there’s some form of rally, some form of reassurance in the market that what the Fed has done, what the Treasury department has done, might be enough. But we need to see if this can continue.”

Fixed mortgage rates also dipped as the saga rumbled on, with the yield on five-year Government of Canada bonds sliding to 2.984% at time of writing, reversing the gains of recent weeks.

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