Banks See A 2.75% Rate Hike In 19 Months

Businessman Consulting Glowing Crystal Ball Economists at the Big 5 banks worked overtime this week, polishing their rate forecasts and fielding calls from reporters.

It seemed every major media outlet in the country ran stories on where interest rates are headed.

Here’s what the “prophets’” predict rates will do by the end of next year (2011):

That’s an average estimated increase of 2.75% in the overnight rate (rounded to the nearest 1/4%).

This number will certainly bring doubters out of the woodwork, as some still fear slow growth and/or a double-dip recession.

As for the first rate change, the banks forecast that rates will start their climb by July. Specifically:

  • BMO:  July 20
  • CIBC:  July 20
  • Scotia:  June 1 (Story)
  • TD:  July 20
  • RBC: July 20 (“Although, markets are becoming
    anxious about a June increase,” RBC says.)

We’ll get a better sense of the date when the BoC makes its next interest rate announcement in nine days.

The next question is: Once rates start rising, how fast will they run up?  According to BMO, “The Bank (of Canada) probably has a predilection to raise policy rates expeditiously.”

The average economist polled by Bloomberg expects a one percentage point increase by the end of this year.  In turn, that suggests a 175 bps hike in 2011…if the bank consensus is correct.

If prime rate jumps 2.75%, that could mean a 35% payment increase for certain floating-rate mortgage holders. (e.g., payments could jump $284 on a regular $200,000, 1.75% variable mortgage amortized over 25-years). This assumes the banks don’t “give back” the 1/4% they withheld when prime rate dropped 3/4 of a percentage point in December 2008.

As for fixed mortgage rates, the bond market will plot their destiny as usual.  CIBC economist, Avery Shenfeld, suggests bond yields could run up more than some people expect—at least initially:

“Once the first hike is in place, the bond market is likely to become even more aggressive in its expectations for subsequent moves. The first hike could also prompt more Canadians to fix their variable rate mortgages, putting even more pressure on five-year yields. Still, hikes in 2011 won’t end up being as steep as what the bond market will, at some point, fear.”

The big banks see the 5-year bond yield hitting 3.75% to 4.10% one year from now.  Based on historical spreads, that would put typical discounted 5-year fixed mortgage rates at roughly 5.13% in 12 months—an 88 basis point increase from today.


Sidebar: As always, take any rate prediction with a dose of scepticism. Rate forecasters attempt to see through very muddy waters and the economy can change considerably between now and the end of this year.

  1. wow. Being in a VRM at prime-.4% for about 1.5yrs, maybe best to lock in at the 3.69% (5yr fixed) still on the table for me. Enjoy the time i had at the rate and settle into something that is still quite good.

  2. Jake,
    Right now the BoC’s rate is 0.25%, and the prime rate you see at CIBC is 2.25%.
    So, if the BoC’s rate goes up by 2.25%, that means they’ll hit 2.5%, which in turn means that CIBC’s prime rate will hit 4.5%, which is exactly double what their rate is today.
    Other banks say the rate will go even higher, which means they predict their prime rates will more than double by the end of 2011.

  3. I have prime – .85 for two more years and like pat gillick used to do with the jays at the trade deadline, Im standing pat!

  4. Just renewed and went fixed 3.85 for 5 years. It’s a few thousand $ a year difference in mortgage payments from what I was paying with prime 2.25. May as well take advantage of the low fixed rates, it’s only going to climb. I think in about two or three years things get crazy.

  5. Eug, I know – but what I am arguing is that the bank itself is forecasing a double rate whereas its chief economist is forecasting a slim rate hike
    so which is it?

  6. Jake,
    You are missing the point. They are talking about two different numbers . . .
    Shenfeld suggests that the BoC “Prime” will go from .25 to 2.5, which, historically speaking, is still “low”.
    The “Bank” says that THEIR PRIME, which is NOT the same thing as the BoC “Prime” will double. In other words, that their lending rate will go from 2.25, which it is currently, to 4.5. That’s double.
    The two are saying exactly the same thing — that rates will go up by 2.25% by the end of 2011 (which will turn the BoC prime from .25 to 2.5 and will turn the Bank Prime from 2.25 to 4.5.
    What’s the problem?

  7. Let’s hope that CIBC’s current Chief Economist’s, Avery Shenfeld is better at crystal balling the economy than the CIBC’s previous Chief Economist, Jeff Rubin. Although I doubt it!
    It was the CIBC`s maverick Jeff that predicted in Apr-08 of 2010 oil at $200US a barrel and one of my all time favourites, 2012 oil of $225US a barrel!
    To quote Dr. Phil, “past behaviour is indicative of future behaviour” or simply, the bank economist’s got it wrong before, so they are destined to repeat!

  8. Actually, let’s hope Shenfeld is wrong. CIBC’s forecast is lower than those of most of the other bank economists.

  9. The problem is that a few banks have picked up on the Shenfeld’s point and promoted the idea of Variable mortgages staying low over the next mid-term.
    And I highly doubt the banks will double their prime rate while BoC keeps its at 2.5% or something incredibly low. Highly doubtful.

  10. John,
    Again, you miss the point.
    Bank Prime IS the BoC rate plus 2.25 (currently).
    If the BoC rate goes up, so does the Bank Prime (and so, your VRM).
    Saying that a BoC rate of 2.5% is “low” is exactly the same as saying that the Bank Prime of 4.5% is “low”. They have both gone up at an equivalent pace.
    If the BoC increases their rate by 2.25%, the Bank Prime automatically doubles (2.25% currently + 2.25% rise). If you think the Banks are going to “pass” on any of the BoC rate hikes you are dreaming — with the *possible* exception of the.25 they didn’t pass on a year or so ago.

  11. I’m also not sure where you get the idea that “a few banks have picked up on Shenfeld’s point and promoted the idea of Variable mortgages staying low over the next mid-term”.
    All of the major banks publish their own forecasts, and the CIBC one is notable for being at the “slow rise” end of the spectrum. See the TD, Scotia or RBC forecasts if you want to see a faster increase.

  12. when this article states that there is a potential 2.75% increase, are they referring to the overnight lending rate or BOC prime? How much does the overnight rate increasing have an influencing on BOC prime increasing (is it nearly 1 to 1?)

  13. Hi Matthew,
    The story refers to the Big 5 Banks’ opinion on where the overnight target rate will go.
    The overnight target usually moves in lock-step with prime rate. “Usually” is the key word because bank prime and the overnight rate have deviated in the past, albeit infrequently.

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