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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