BoC Promise May Not Have Legs

The Financial Post wrote yesterday that the Bank of Canada may not hold its key lending rate at 0.25% until June 2010 as planned.  Story Link

Certain market watchers have been sensing this but not many people have come out and said it.  National Bank Financial’s Stefane Marion is bucking that trend. He expects “the first Bank of Canada rate hike in the first quarter of 2010.”

National Bank economist, Yanick Desnoyers, agrees, saying, “The time for tightening is not yet at hand, but June 2010 seems too late.”

But not everyone is that bullish on inflation and the economy.  CIBC chief economist, Avery Shenfeld, says lingering unemployment will stall the economy and “push back any rate hikes until 2011.”

RBC Economics says:  “We expect the Bank to maintain its conditional commitment to keep the overnight rate at 0.25% through the end of the second quarter of next year.”

More objective observers may want to turn to the financial markets for the answer.  The markets are where people have the most money at stake.

Have a look at what stock traders have been doing…

TSXNow check out the tracks that bond traders have been leaving. (The chart below is the 5-year government bond yield.)

5-year-BondBoth of the above markets are acting as if the recession is fast becoming an afterthought.  (Steady increases in stock prices and bond yields are very common in the months before inflation and economic growth make their comeback.)

For what it’s worth, if you want to base your mortgage decision on where prime rate is going, it’s not unreasonable to assume prime could start rising again in 9-12 months.  That seems to be the average economists’ opinion these days.


Note: These thoughts are not a prediction or advice. They’re just an observation.  Bond chart courtesy of the Bank of Canada.  TSX chart courtesy of

  1. Is this article suggesting that inflation will become a problem sooner than anticipated, and this will spark a sooner than expected rate hike? Is inflation the only condition on the BoC’s condition guarantee?

  2. what to do? I have about 4 years left on a .75 below prime, clocking in at 1.5% right now? I have a rate hold on a 3.75 to finish the remaing 4 years? Lock in or ride it out?

  3. Hi O.H.,
    FP’s article is suggesting the BoC may raise its overnight lending rate before June 2010. If that happens, prime rate should go up simultaneously.
    The BoC’s says its mandate is to:
    “…contribute to solid economic performance and rising living standards for Canadians by keeping inflation low, stable, and predictable…”
    A strong economic recovery could whipsaw core inflation above the BoC’s 3% upper band before Q2 2010. I haven’t seen many people predicting that but it’s possible. Economic cycles are far more compressed nowadays, so things move quicker.

  4. Rob: Thanks for the reply
    Chris: I’m in a similar product (Prime minus .8) and I plan to ride it out (I have 4 years left in the term). Rates would have to go up 2.25% to be at the same level – and frankly FOR ME, that is too much to pay on top of your great deal. And remember that if, for instance, it takes 1.5-2 years to rise another 2.25%, you have been saving money the whole time it was lower. But again, these things are more a matter of risk tolerance too.

  5. I’ve been watching the mortgage rates and cringing thinking about my own. I still have a large mortgage with just over 2 years left at 5.36%. I’ve really been thinking about early renewal. Is it worth the cost of breaking it to go with a variable product – Prime + 0.4. How high and quick do you think the prime rate will rise?

  6. Canada will likely begin to emerge from recession by the middle of this year amid signs the paralyzed financial system has begun to respond to the extensive actions by the world’s governments and central banks, the Bank of Canada said Thursday.
    Release of the Monetary Policy Report in Ottawa Jan. 22, 2009. (from National Post)
    Mark Carney is new at his job and may take a number of years before:
    A) He understands his predictions are wrong and gets him in hot water.
    B.) What he learned in school does not apply in the real world.
    C) Reading Greenspans notes and learning how to talk and make no sense by using terms no one understands.

  7. Perhaps I’m not reading the above correctly, but the January MPR seems accurate at this point, does it not? The economy has indeed emerged from recession, according to the most recent MPR released on July 23.
    Also, the implication that he suddenly has a ‘real job’ after spending all of his life in the ivory tower doesn’t fly. He spent 13 years with Goldman Sachs in a variety of senior positions before joining the Government of Canada as an Senior Associate DM of Finance in November 2004.
    IMHO, Carney’s done well at the BoC so far. It’s too early to pop the champagne corks yet, but folks who were insisting this recession would be the Great Depression redux are looking silly at the moment.

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