BoC To Front-Run Fed

The Bank of Canada often takes its cues from the U.S. Federal Reserve when setting Canadian interest rate policy.

This time, "The Bank of Canada is basically going to fly solo," says CIBC economist, Benjamin Tal. That’s because Canada is in a clearly stronger economic position than our southern neighbour.

Investment manager, MFC Global, agrees. It estimates that the Bank of Canada will keep its key lending rate 25-75 basis points above the fed funds rate starting this summer.

So, with economists calling for an imminent rate hike, people naturally want to know how fast rates could move.  We’ve noticed a big uptick lately in questions like: “How quickly does prime go up?”

In reality, that’s kind of like asking: “How long will it take Alex Rodriguez to hit 20 home runs this year?” You know what A-Rod has done in the past, but you’re never sure what he’ll do this year.

Just for kicks, we looked back at the last four rate cycles for clues. Doing so illustrates that it’s taken an average of 7.75 months for prime rate to rise the first 1% in a rate increase cycle. It’s taken 12 months, on average, for prime to jump 2%.

These numbers are not statistically sound because there aren’t enough samples.  Nonetheless, it’s clear that the Big banks’ forecast of a 2.75% hike in 19 months seems achievable. (Not our prediction, just an observation!)

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Sidebar:  Here’s commentary from Peter Aceto, the chief executive of ING Direct Canada, on why fixed mortgage rates have jumped so fast lately:

“It's pretty likely in this environment that your funding costs [as a lender] are going to be higher in 90 days or 120 days.”

Aceto says RBC “may have been thinking about that risk” when they chose to lead the market and raise fixed rates 85 bps.