Bank of Canada Governor David Longworth thinks Canada’s economy will be weaker than expected. He also thinks inflation will be tamer than expected. What a nice combination for interest rates.
It looks like economists’ see-sawing interest rate speculations are now tilting towards rate cuts. (Keep in mind this can change in a heartbeat.)
5-year bond yields fell to 3.03% yesterday, their lowest close in over 19 weeks. That, of course, is good news for fixed-rate mortgage shoppers. Now we await Friday’s GDP report, which could spike yields higher or take them below the key 3% support level.
In the meantime, here’s what Bay Street has to say:
- Bloomberg’s survey of major economists has 13 of 13 predicting the Bank of Canada will leave rates unchanged when they meet next on September 3.
- Scotia Capital’s Derek Holt: Predicts a 1/2% rate cut by year-end
- Laurentian’s Carlos Leitao: “I think in Canada, if we’re not in recession, we’re mighty close to it.”
- Merrill Lynch’s David Wolf: Expects a 1/4% rate cut in both December and January
Last modified: April 25, 2014
I’m still expecting rates to go up. With the unease in the debt markets, very few loans will happen at such low rates. It’s the old supply and demand thing. When the price is forced down artificially (by central banks in the case of interest rates) supply dissappears.
totally agree with al, it all depends on what you want to happen, i see rates going up substantially in the next 12 months, if not mortgages will be tough to acquire
Don’t mortgage lenders borrow from the central bank? In that case, a lower central bank rate should mean the same margins for the lenders, doesn’t it? In which case, why would lowered central bank rates squeeze supply? The lenders still make just as much since the spread between what they pay and what they charge stays the same!
Tom,
You’re partially right. Low central bank rates affect the cost of the money for the lenders, so the margin can stay the same.
Example: the bank pays an average of 3% for their “borrowed” money (bank deposits, GICs, etc) and lend it at 5.5%. This gives them a 2.5% profit. If the BOC raises rates and the banks now pay an average of 3.5% and lend at 6%, the margin stays the same.
However, there is the risk premium. Some part of the 2.5% profit will pay for the borrowers who default on their loans. The unease I mentioned in my first point is towards growing default rates. With BOC setting its rate so low, there is little room to increase the risk premium. For instance, they would have a hard time lending at 8% when prime is 4.5%. To protect themselves, they simply raise the bar for lending which is the same as restricting supply.
Hope this helps. Also, check out the next post commercial lending. Another symptom of the same disease.