Rate Cut Speculation

BofC A week or so ago most people thought the Bank of Canada would keep rates unchanged for a while.

Things can change fast.

Many now feel the Bank of Canada may soon need to cut rates to keep our economy growing.

Why?  Well, the BoC’s David Dodge says risks to the world economy are more serious today than one month ago.  Dodge says he’ll need to take this “into account” at upcoming interest rate meetings. 

In addition, our economy is increasingly being weighed down by a strong Canadian dollar.  1/3 of Canada’s GDP is based on exports to the U.S., and it’s got 16% more expensive for Americans to buy our products since Jan. 1, 2007.

J.P. Morgan economist Ted Carmichael says, “We now expect that the Bank of Canada will need to cut its policy rate by 25 basis points on each of its next four decision dates through April.”  If he’s right, rates could drop 1% by next spring.  A more consensus view is probably 1/4% to 1/2%.

Despite the worry, some still feel that consumer spending, demand for our raw materials, and a strong housing market might offset the global weakness threatening Canada’s economy.  If so, rates will likely stay put.

Whatever the case, almost everyone can now agree that there is no longer any urgency to lock in mortgage rates.

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Upcoming BoC Interest Rate Meetings:

  • December 4, 2007
  • January 22, 2007
  • March 4, 2007
  1. Hi FT, You’re absolutely right. It’s a wonder that economists and journalists can make a living predicting interest rates. You rarely see the same “expert” quoted in the papers continually. I think that’s because they’re wrong so often. All of this is why we convey the sentiments of the “experts” but are loathe to make rate predictions. It’s more fun to gamble in Vegas.
    Cheers,
    Rob, C-Ed. CMT

  2. I think I’ve figured out why something like 70% of Canadians (including me) just take the 5 year mortgage and then just sign on renewals. The whole industry has no clue what’s going on.
    When rates were the lowest point through 2002-2004 there were ads everywhere touting how much you can save on variable rate mortgages. Now that rates are higher I’ve barely seen any. As MDJ pointed out just last month there were tons of news to lock in now or the world will end. Now the exact opposite is said.
    I think the answer lies in the fact that people just don’t believe all the wolf callers anymore. They are just as happy to accept that a 5 year term is good enough. Every 5 years they have to go through the renewal. They just accept that there will be certain costs to owning a home and this will be one of them. There are far better things to worry about, like figuring out how many times you can curl your toes on your new carpet before they feel tingly or timing how long it takes your kids to run around the new lawn, than interest rates and mortgage costs that people just don’t care.

  3. Not sure if it’s accurate to say that “the whole industry has no clue what’s going on”. The thing everyone has to keep in mind is that these are *projections*. It involves taking all the information you can and making the best predictions you can, but you’re going to be wrong some of the time.
    To skewer economists for getting interest rates wrong is no different than berating the local weatherperson for getting the 14 day extended forecast wrong. Same principle.
    IMHO, the best thing consumers can do is realize this fact and make their decisions accordingly.

  4. Al – the problem is that economic “gurus” tend to shout their predictions like they should be written down in stone. If they don’t have enough information to predict interest rates with some level of accuracy then they should keep their mouths shut!
    Mike

  5. Al and Mike,
    You’re both right on the money.
    Guessing rate direction doesn’t get you anywhere long-term. The best we can do is trust historical relationships (e.g. choose low variable rates instead of fixed rates, whenever our risk profile permits it).
    As for economic “gurus,” I can’t comment much because I’m not sure they really exist. Suffice it to say, people who predict coin flips should keep their mouths shut too.
    Cheers,
    Melanie ;)

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