Economics homework help on Money and Banking Article Report writing, 825 words
Economics homework help on Money and Banking Article Report writing: The purpose of this exercise is to apply the relevant principles, ideas, and concepts covered in this course to the analysis of a real world event or issue.
- You are required to write a short paper (2-3 pages written with a 4-5 pages total maximum length – including the cover page & list of sources) based on the following topic. The report is worth 10% of your final grade.
Topic
Read the following articles and any others you encounter that help to address the questions listed below.
https://globalnews.ca/news/4324879/bank-of-canada-interest-rate-hike-july-2018/
Bank of Canada delivers another hike, key interest rate rises to 1.5%
By Erica AliniNational Online Journalist, Money/Consumer Global News
As widely anticipated by economists, the Bank of Canada (BoC) raised its trendsetting policy rate to 1.5 per cent, up from 1.25 per cent on Wednesday. It was the fourth rate increase in the last 12 months.
READ MORE: Here goes another rate hike. Time to consider variable-rate mortgages
The central bank said it expects the Canadian economy to expand by 2 per cent per year on average between 2018 and 2020, noting that recently implemented tariffs on steel and aluminium will likely have only “modest” effects on growth and inflation.
Consumer price inflation is expected to edge up to 2.5 per cent before returning to around 2 per cent by the second half of 2019.
The bank predicted the impact of U.S. duties on Canada and Ottawa’s retaliatory measures will shave nearly 0.7 per cent from Canada’s economic growth by the end of 2020. However, that negative blow should be largely offset by the positives for Canada from higher oil prices and the stronger U.S. economy, the central bank said.
The BoC also warned that U.S. tariffs on the auto sector’s integrated cross-border supply chains would have “large impacts on investment and employment.” But the bank did not quantify the possible effects of auto tariffs on Wednesday.
U.S. President Donald Trump has proposed duties of 25 per cent on all auto imports, including those coming from Canada. The U.S. Department of Commerce started investigating the option of imposing the tariffs in May.
Canadian businesses must also contend with the uncertainty surrounding the difficult renegotiation of NAFTA, for which talks have stalled.
Speaking in the wake of reports that the U.S. is readying another round of tariffs on $200 billion worth of Chinese imports, the BoC also has its eye on how widening global trade disputes will affect the world’s economy.
It warned that “escalating trade tensions pose considerable risks to the outlook” at the global level.
Still, BoC governor Stephen Poloz previously signalled that the bank would be guided by actual data rather than trade rhetoric in its assessment of where interest rates should go.
READ MORE: Canadians scrambling to pay off debt as interest rates rise: poll
Looking ahead, the bank predicts Canadian growth will continue to see bigger contributions from exports and business investment, which were both stronger than expected in the first three months of the year.
At the same time, household spending will represent a smaller and smaller share of overall growth due to the dampening effects of higher interest rates and stricter mortgage rules, it said.
A diminished reliance on the housing sector and consumption as engines of growth is “something the BoC has been waiting for years to see,” BMO economist Benjamin Reitzes said in a note to clients shortly after the rate announcement.
However, “while the wait appears to be over, protectionism is a risk to that process,” he added.
Moving forward, the bank said it expects higher interest rates will be necessary over time to keep inflation near its target, however, it intends to continue along a gradual, data-dependent approach.
– With files from Andy Blatchford at the Canadian Press
© 2018 Global News, a division of Corus Entertainment Inc.
Rosenberg: The Bank of Canada picked a curious time to raise rates
Time will tell if the BoC’s tightening was prescient. But I come from the camp that says when uncertainty is running high, it’s best to do nothing
David Rosenberg
July 16, 2018 Last Updated July 17, 2018
Interesting time for the Bank of Canada to have pulled the trigger, as it raised the policy rate 25 basis points last week to 1.5 per cent.
The move came after signs of decelerating growth in household credit demand and a slowing in wages, albeit from lofty levels. Not to mention that when you factor in the impact from the contraction in the workweek in June, the net effect was the equivalent of a 40,000 job loss (even after accounting for the headline gain, which was largely skewed by part-time employment in any event.)
And economic uncertainty caused by the Trump-inspired trade war is rising to its third-highest level on record.
The Bank has already moved four times this past year, matching the Fed. Now some may say that the Bank is coming off a lower level of the overnight rate, but that does not hold water. When you factor in the size of the Fed balance sheet, the Fed Fund rate is really -2.9 per cent. And don’t forget that it is the U.S. that is enjoying fiscal stimulus.
Capacity constraints and inflation risks are far more acute in the U.S., especially in the context of the labour market. It was only on March 13th of this year that the BoC’s governor Stephen Poloz delivered a speech titled Today’s Labour Market and the Future of Work, which concluded “that there remains a degree of untapped supply potential in the economy.”
To some extent, the press statement addressed this — “underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.” So the economy is not yet at full employment. The Bank sees a 2.8 per cent real GDP growth rate in Q2 followed by a moderation to 1.5 per cent in Q3, and didn’t do much to the view that the economy grows close to 2 per cent in the 2018-2020 forecast period.
This is not that far off from potential growth, so this means that we could well be stuck with an “output gap” two years down the road — one reason why inflation will not be able to return in any meaningful or sustainable capacity.
Indeed, as for the inflation threat, come on. The BoC acknowledges that there is still some slack left in the labour market, but based on their own projections, it could well be that the slack remains until 2021. As it stands, netting out the effects of gas prices and minimum wages, inflation is running at just 1.8 per cent.
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Only time will tell if the BoC’s tightening move was a prescient one. But I come from the camp that says when uncertainty is running as high as it is, it’s best to sit on your hands and do nothing. Outside of the U.S., nobody else in the world is raising rates besides some emerging markets in defense of their sharply weakening currencies. While it is 100 per cent true that the Bank could always unwind the rate increase if need be, at the same time, it could have waited this one out to assess how the trade situation unfolds.
Even under its own forecast the output gap may not close, which means that the Bank does not exactly have to fret about its anti-inflation credentials. The Bank, to its credit, did incorporate the impact of the trade actions already implemented (and what Canada has done in retaliation), and the effects of all the uncertainty — the negative growth impact “is now judged to be larger given mounting trade tensions.” It is this last comment that leaves me wondering aloud, “So why hike?”
The Bank seems to be relying on business investment to pick up the baton given capacity constraints, but many of the sentiment surveys are not flashing a big capex pickup. The Bank also sees exports carrying the day, but we have seen this song sung before. To be relying on U.S. demand growth once the tax cuts subside, in my view, is a dangerous forecast to have as your base case.
Not to mention that the rest of the world is cooling off substantially, signalled by the downturn in cyclically-sensitive copper and base metals in general over the past few months. At the same time, the Bank acknowledged that “household spending is being dampened by higher interest rates” — well, last week’s action is going to dampen that 60 per cent of GDP even more. So we had better get that export and capex offset, but the odds are we do not.
The question is whether it is possible, or even appropriate, for the BoC to have such a constructive view of the capex outlook considering what U.S. business contacts are telling the Fed? From the last set of FOMC minutes: “Many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.”
In conclusion, the question that must be asked is what is so special about Canada that only the BoC and the Fed have hiked rates this year of all the developed central banks? Not just once, but twice. Has the ECB gone? No. The BoE? No. The BoJ? No. No others — just seven emerging market central banks who did so to defend their sagging currencies.
At least the Fed can point to huge fiscal stimulus but what can the BoC really point to? An expected 2.8 per cent second quarter GDP growth performance followed by a relapse to 1.5 per cent this quarter? Wow. The BoC has raised rates by 100 basis points this past year and the incremental debt service drain on the household sector will be more than $10 billion, or the equivalent of a 1 per cent pay cut.
In other words, just less than half of the BoC’s blended estimate of where wage growth actually is (+2.3 per cent) will be offset by higher interest payments! Nice, so long as you’re not long Canadian consumer discretionary stocks, that is.
David Rosenberg is chief economist and strategist at Gluskin Sheff + Associates Inc. and author of the daily economic report, Breakfast with Dave.
Cutting through the smoke: Bank of Canada’s credibility at top of Poloz’s mind as he raised rates
Kevin Carmichael: If there was a reason to panic, the men and women on the Bank of Canada’s Governing Council would have found it
July 17, 2018 Last Updated July 17, 2018
Ahead of last week’s interest-rate announcement, I talked to a Bay Street economist who wondered how much credibility would factor in the Bank of Canada’s decision. Quite a lot, as it turned out.
“It’s always top of mind,” Stephen Poloz, the governor, told me in an interview after the Canadian central bank raised the benchmark rate for the first time in six months on July 11. “If you were thinking about doing something differently, your explanation would (have to) be very rigorous because you’d be thinking, ‘Well, my credibility is at stake if people think, ‘oh that’s just smoke.’’ You can’t put out something that’s just smoke. No one is going to buy it. So you need to have really good reasons for whatever it is you do or don’t do.”
Those who thought the Bank of Canada would — or should — leave interest rates unchanged last week appeared to put too little weight on what such a swerve would have meant for the central bank’s reputation.
- In era of trade uncertainty, the Bank of Canada’s Stephen Poloz was made for this moment in history
- Bank of Canada raises rates as Poloz’s tale of recovery from Great Recession finally starts coming true
The vast majority of market participants had judged, correctly, that the central bank’s conditions for an interest-rate increase had been met. The Bank of Canada is constantly processing information, but policy makers had made clear that they were primarily interested in three things: business investment, exports, and the response of heavily indebted households to higher interest rates. Data on all three of those items had been mostly positive. Inflation was on target, but with upward momentum.
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When policy makers left interest rates unchanged at the end of May, they said they still believed that borrowing costs needed to be higher. Therefore, if they hadn’t raised the benchmark rate last week, they would have needed a compelling reason to disappoint so many people. There wasn’t one. Assuming that U.S. President Donald Trump, a consistent liar and flip-flopper, is serious about wrecking the global trading system would have looked like “smoke” against hard evidence that most Canadian exporters are expanding to keep up with orders.
The Bank of Canada acknowledged that punitive U.S. duties on automotive imports would hurt Canada, but a resolution to trade differences is also a possibility. The later could boost economic growth and put upward pressure on inflation, which is ultimately what the central bank cares about.
“There are lots of things I could tell you that are big and nice, as opposed to hairy, that we’re also not allowing to influence our decisions,” Poloz said in the interview. “For example, NAFTA gets restored. Boom. Aluminum and steel tariffs just go away. We should put a higher weight on that possibility than on auto tariffs, frankly. But, you know, they’re both big and they’re harder to quantify.”
Poloz isn’t sticking his head in the sand. Rather, he’s reinforcing his message of the past few years that Canadian monetary policy will be guided by a careful, meeting-by-meeting analysis of data, not a predetermined path or hypothetical scenarios.
Trade dominated deliberations, suggesting that if there was a reason to panic, the men and women on the Governing Council would have found it. Household debt remains a threat, but the central bank’s analysis of mortgage data found relatively few Canadians will be forced to renew their home loans over the next couple of years. That means most homeowners have time to prepare for higher interest rates. Bottom line: there was no good reason to avoid raising interest rates last week, at least according to the conditions that the central bank had set.
It’s easy to forget about the role credibility plays — or should play — in policy making because so few in Ottawa are committed to it.
Last month, Foreign Affairs Minister Chrystia Freeland justified her government’s decision to retaliate against U.S. aluminum-and-steel tariffs by citing the “degree to which there is national solidarity” on the subject. There is no evidence in that answer that the government has thought through what it is doing. The decision to engage Trump might be popular, but it lacks credibility because no one has offered a thorough explanation for why tit-for-tat was chosen over other tactics.
Credibility matters. In 2015, when oil prices collapsed, the Bank of Canada cut interest rates to cushion the blow. But Mexico’s central bank had to raise interest rates to slow capital flight and keep the country’s currency from collapsing. The Bank of Mexico is highly regarded by its peers, but it hasn’t established the complete trust of international investors yet.
Anyone interested in understanding the way Poloz approaches his job should keep Mexico’s recent experience in mind.
“They just got pounded, absolutely pounded, way outsized compared to the size of their shock and their economy,” he said. “We don’t want to have any risk of that happening to us. That’s why (credibility) matters so much.”
https://www.huffingtonpost.ca/2018/07/14/stephen-poloz-smaller-home_a_23481995/
Bank Of Canada’s Stephen Poloz Suggests Buying A Smaller Home, After Hiking Interest Rates
The guy may have a point.
By Daniel Tencer July 14, 2018.
The governor of the Bank of Canada, Stephen Poloz, had some advice this week for Canadians facing higher housing costs thanks to the Bank’s interest rate hike: Just buy a smaller house.
“People who don’t qualify for a mortgage on the house they wish today have multiple avenues of adjustment,” Poloz said during a press conferenceannouncing the rate hike, “one of them being to just go ahead to buy a smaller or less expensive home.”
One (perhaps cynical) way to view his comments is: You’re on your own. The Bank of Canada isn’t going to stop hiking rates to save you money on your mortgage payments.
Aside: Goldman Sachs estimates a 30% probability of a Canadian housing bust
But while Poloz’s comments may come off as insensitive — especially to would-be homebuyers who watched affordability deteriorate as the Bank tripled its key lending rate over the past year, to 1.5 per cent from 0.5 per cent — there may some wisdom in what he says.
Because we Canadians sure occupy a lot of space. According to a PricewaterhouseCoopers (PwC) report from 2017, Canadians own, on average, the third-largest homes in the world, behind only Australians and Americans. At nearly 2,000 square feet, our homes are more than twice as large as homes in Britain, despite the fact that our families are no larger than theirs.
PRICEWATERHOUSECOOPERS
It’s estimated that the average home size in Canada doubled from the 1970s to 2000, though that trend has levelled off, largely thanks to high land costs in Toronto and Vancouver, which have pushed developers to build smaller homes (as have land use regulations requiring more dense neighbourhoods).
Excessively large homes are a liability, economically and to the environment. Heating a 2,000-square-foot home in winter, then air conditioning it in summer, makes for very high energy use and a large carbon footprint.
And the explosion of sprawling suburban neighbourhoods has eaten up much of the accessible land around our city centres. Developers today, especially in Toronto and Vancouver, say one reason house prices are so high is that land supply is so low. In retrospect, it may not have been such a good idea to surround our cities with low-density, low-population neighbourhoods.
Today, those neighbourhoods are increasingly occupied by aging empty-nesters, often single seniors living alone in giant homes. Even in rapidly-growing cities like Toronto, suburban neighbourhoods are actually shrinking in population.
All this points to the need for better land use, especially if — as is the plan — Canada’s population continues to grow rapidly through immigration.
Housing affordability eroded to its worst level in nearly three decades in Canada in the first half of this year. Market theory tells us the best way to reduce home prices is to increase supply. With the increasingly limited space we have, smaller housing units are a practical solution.
Poloz’s rate hike doesn’t help buyers much, but if it does nudge buyers away from the McMansion lifestyle, we may all be better off in the long run.
Daniel TencerSenior Business Editor, HuffPost Canada
Issues/Questions to be addressed:
- The articles above highlight Canadian monetary policy moves in the past year. The first article highlights the fourth increase in the BOC’s target rate for the overnight interest rate (that just occurred on July 11th ). What did the Bank of Canada (BOC) announce on July 11th 2018? Explain in words why they BOC did what they announced. That is, explain in words the economic rationale for their move.
- The second article argues that with all the economic uncertainty at present the BOC should have not raised interest rates at this point. Explain in words the reasoning behind this assertion and how/why some might hold these contrary views.
- The third article argues that to maintain their credibility the BOC needed to raise rates in July 2018. Explain in words the economic logic behind this assertion.
- The fourth article notes that recently the Governor of the BOC has recommended that Canadians should consider buying smaller homes. Explain in words the economic reasoning behind this recommendation.
- Finally as the BOC raises interest rates should the government consider loosening their mortgage market rules in order to make residential mortgages easier to obtain and more affordable? Briefly explain why or why not.
Basic requirements:
- 2-3 pages: typed, double spaced (regular margins top/bottom & right/left margins) with a 12 point font size.
- Reports must include: A cover page AND a list of sources used (neither of these count towards the 2-3 page count total mentioned above – hence the 4-5 page total page count mentioned earlier).
- Hard copy to be submitted to the professor either in-class, to his office (IC-284), OR to the Department Dropbox.
- The reports can be done individually OR in groups of up to 5 people (in total) from any section of MGEC71 this term.
Due date: On or before Tuesday, August 7th (no later than 5 pm) – To: Either IC 284 (Professor Parkinson’s office) OR the Management Department’s assignment drop box (across from the MESA office on the 2nd floor of the IC-Building)
Note
1) It is important that you cite ALL materials that you use (including web pages, i.e. cite the name of the web site and the URL address).
2) It is important that the report be written carefully, clearly and concisely. This paper is about the quality of your discussion and arguments rather than the quantity of material you present.
3) There will be a penalty for late submission (of 20% removed per day late).