No BoC Rate Hikes in the "Medium Term"

Rate-Predictions When the Bank of Canada predicts interest rate direction, people listen.  It’s predictions yesterday were especially worth noting.

The BoC expects three things, among others, to occur over the next 2 years:

  1. Slowing exports will put a “significant drag” on Canada’s economy.
  2. Today’s relatively higher interest rates will stall consumer and business demand.
  3. Inflation will fall towards the Bank’s 2% target.

These expectations are highlighted in the BoC’s latest monetary policy report

If true, interest rates will remain the same or lower, at least for the “medium” term (as the BoC puts it).  Although many pundits are translating this wording into “through 2009.”

But, the BoC’s report isn’t all dovish.  They do acknowledge risks that could push rates higher.  Yesterday’s report, for example, states, “The main upside risk is that excess demand in the Canadian economy could persist longer than projected.” 

In sum, however, their bias is still slightly “tilted” towards lowering rates.

  1. I wonder with the news of inflation hitting 2.6% for September if they are going to hold off on an increase in December. I guess we will have to wait until we get October numbers, but if they are expecting things to even out on their own I guess we will have to wait, as always, to find out.
    I’m only a few months in to my first 5 year term on my mortgage, and so far my lock in seems to be a good idea. I still have a long time to wait to see if my pick was a good decision.

  2. My husband and I got a one year mortgage because a financial advisor recommended it. Now we wish we would have got a five year fixed like we originally planned. I guess hindsight is 20/20 but now I realize that we would have been willing to pay a little extra for the security of knowing our rate next year.

  3. Hey Jen, I wouldn’t count the short term plan out until you see what the next 5 years holds. I would think in about 18 months the US economy slowing will have a very big effect up here in Canada. After that we will probably see the rates going back down to make sure we don’t fall apart because of the US.
    No one can call the rate in the future though, not even from now until December, let alone over a 5 year period.
    Who knows, all we need is something drastic to happen and our unemployment to spike, then consumer spending to drop and voila. . . rate cuts. Maybe in 3 years I’ll be the one kicking myself because the going 1 year rate will be 3.75% and I’m still in my 5.09% for another year and a few months.

  4. Hi Jen! Based on the odds, you’ve made the right choice. Although I understand how certainty can be comforting. It’s why I myself chose a fixed rate for my own mortgage.
    Traciatim is absolutely right in that rate forecasting is a gamble and not a science or art. It’s like investing for retirement. No one can predict the stock market over the course of a year. In fact, you’re almost certain to have some very big down years. In the end, however, you’ll have likely a built up a considerable nest egg.

  5. It’s very scary when we have to make a decision for our mortgage. It’s the biggest investment/debt we will have in our life! We are entering into the window where we can renew early without penalty. We are “safe people” and opt for the safety/certainty of fixed 5 year terms. We are finally under the $100 000 mark, but want to make a wise decision for our next 5 years. I’d hate to give up our 5.13% rate to renew early only to kick myself if they go up before early February!!! What to do, what to do?!?

  6. Hi Denise,
    Thanks for the note. Predicting rates is usually rather futile. For what it’s worth, however, the “experts” seem to think bond yields will remain low through February. Moreover, most people think the fixed-rate premium over bonds will also shrink.
    If you believe them, then holding on to your 5.13% rate until February may be a reasonable choice. It depends how good a rate you can get today, your penalties, and on your openess to other options besides a 5-year.
    If you want a complete perspective, it never hurts to call a mortgage planner for a free consultation.
    Good luck,

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