BoC Leaves Rates Unchanged; Removes Conditional Commitment

Bank-of-Canada-Rates The Bank of Canada (BoC) has kept its key interest rate at 0.25%.

What’s more interesting is the Bank’s written statement. It says, “With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus.”

In other words, the BoC is no longer pledging to refrain from rate hikes. That virtually cements a June 1 or July 20 rate increase say analysts. 

“It is an absolute 100% certainty [the Bank of Canada] will raise by July,” TD economist Craig Alexander said on BNN today.

The 5-year government bond yield (which influences 5-year fixed mortgage rates) is flying 13 basis points higher as we speak. The 1-year bond is up 14 bps!

The BoC also said it “expects the economy to return to full capacity in the second quarter of 2011.” That’s one quarter sooner than its previous forecast.

The BoC’s next interest rate meeting is June 1.

  1. In the old days the BOC would just rise rates not spend months talking about it.
    The higher dollar higher taxes and higher gas prices will act like a brake on the economy. This shows the BOC is still concerned about the economy and the real estate bubble.

  2. It’s important for the BoC to forecast its moves… The last thing we need is a central bank that leaves people guessing by constantly surprising the market.
    But they’ve certainly gone hawkish…

  3. I think the central bank’s target rate will increase more slowly than some of the alarmists are predicting. If we decouple our interest rate policy from the Fed, our dollar will appreciate even more against the greenback and that will slow the economy.
    Add that to our relatively high unemployment rate and I don’t see the kind of inflationary pressure that would make the case for a significant increase in the target rate.

  4. I’ve noticed a tendendcy for the bulls use terms like “alarmists” and “doom and gloomers” to the describe the bears.
    Perhaps I’m being myopic, but I can’t recall any such pattern of the bears labeling the bulls similarly.
    I wonder why that is??

  5. If you’re referring to David’s comment above, he just called bulls alarmist, not bears. By definition, you have to be bullish on the economy to predict that rates are going to rise fairly quickly.
    If, in contrast, you think that rates are going to rise not at all or at a slower pace, you would be bearish on the economy.

  6. I disagree that higher rates will by definition represent evidence of a healthier economy. Rather I suggest that higher rates (both long and short) can derive from supply and demand in the bond market, regardless of the health of the economy.
    But leaving aside that argument, I carelessly used bull as a proxy for optimist and bear as a proxy for pessimist. On this site, the optimists see continued low rates, and the pessimists see higher rates.
    My point was that the optimists like to label the pessimists (pragmatists? :-) as doom and gloomers. But I can’t recall a similar label being assigned in reply.

  7. To clarify my position Dave, I am bearish on the economy because I worry a lot more about deflation than inflation.
    The “alarmists” I was referring to in my earlier post are those who suggest that rates are going straight up and who say things like “only a fool would stay in variable”. For the record, I would be just as skeptical of those who take the opposite extreme position. While absolute points of views make headlines, reality is usually more nuanced and complicated.
    The purpose of my post was to offer a counter view to the media’s popular sentiment that everyone should jump in to fixed ASAP – a sentiment that is ‘alarming’ many of the customers I speak to. I apologize if my choice of words offended you.

  8. agree with David Larock on this one.
    Far too many people predicting endless rate hikes as if we were in a hyper-inflationary environment. FAR FROM IT! The economy is bouncing from a depp recession and with the Government’s artificial stimulus efforts either having run out or soon to be so, I too see deflation as a more likely scenario for the next few years. That doesn’t mean the Bank wont raise rates in the short term – they likely will. But I would be very surprised if rates rose nearly as far as most are predicting. The world economy is just too weak (except for China possibly) and with too many debt problems.
    There is a massive media hype on to get people to jump into fixed rates now as ‘they can’t possibly move lower’. Yeah, well guess what, they said that 1 year ago, and 2 and 3…..

  9. I think mortgage rate and prime rate will increase slowly in the coming few quarters. I also think that mortgage rates will not decrease anymore, it will just slowly increase without any decrease. So why should I not lock my mortgage rate if I know it will just increae and decarease anymore.

  10. Again, Canada did not experience a “deep recession”. It makes for great rhetoric, but the facts do not support that contention. According to Statistics Canada, the 2008-09 recession was both “less severe and shorter than in the other G7 nations”, and was not “unusually long or severe in comparison with the recessions of 1981-82 or 1990-92.”
    Reference: http://bit.ly/aZQQEs
    Do you remember the pronouncement you made on March 25th, on the “Carney Moves Rates” article? You said “here we go again… everyone goes crazy about rate hikes coming. I still don’t see it…” Four days later, on March 29th, RBC and other banks significantly hiked their fixed rates due to funding costs. It was the greatest one day jump in posted rates since 1996.
    I’m only pointing this out to illustrate the futility of taking such a strong stance on interest rates when there is considerable uncertainty about the magnitude (if not the direction) rate changes will take. Very easy to end up with egg on your face.
    Al R

  11. I don’t think higher rates are dependent upon higher inflation. In the face of unprecedented global debt (and in particular sovereign debt), I suggest that competition for the supply of capital can produce higher rates even in the face of low or average inflation.

  12. Rob, does the increase in the 5-year government bond yield make it look like to you that fixed rates will be raised again soon?

  13. The whole “switch from variable to fixed now” argument is a fairly ignorant and narrow statement. The fact is, everybody’s situation is different, and time moves so quickly that the “now” sentiment makes the statement too narrow.
    If your current variable is prime or even prime+X for whatever reason, you’d be a lot more compelled to lock into a fixed rate than a person who’s in a prime-.5% or someone with a prime-1% variable 2 or 3 years ago.
    Also, locking in to a fixed when they were at their lowest (March, I think?), would be a lot more compelling than locking into a fixed now.
    Bottom line — what a good idea is for person A may not be applicable to person B, or what may have been a good idea 2 weeks ago, may no longer be applicable today.

  14. “What a good idea is for person A may not be applicable to person B, or what may have been a good idea 2 weeks ago, may no longer be applicable today.”
    James, You couldn’t be more right about that! -Rob

  15. I feel the rates will go up in the short term ,but not at the magnitude that the big banks would like us to believe. If you have a low variable rate now , then you will still be in money down the road. All the people who jump on the fixed rate bandwagon will pay more than you and me. The big banks will thank them for locking in! They are spreading fear and people are buying into it. Look at the historical numbers and a low variable comes out on top over 90 percent of the time.I would go with the odds and save money.

  16. Hi Mike,
    Here’s the recent 5-year bond yields vs posted rates (as of this writing).
    March 29: Bond 2.91%, Posted 5.85%
    April 14: Bond 3.13%, Posted 6.10%
    Yesterday: Bond: 3.21%: Posted 6.10%
    Things haven’t got extended enough yet to warrant another Big 5 bank rate increase, but that could change quickly.
    Cheers,
    Rob

  17. There is truth to that but I wonder how much of a premium that would really add. Inflation will probably always be the leading stimulant of interest rates in Canada because its impact is so widespread and immediate on the economy.
    In Canada’s case, few countries have a credit rating as strong as us. I think long-term we’re in a good position. Maybe our rates will rise 50 bps over time due to global debt levels and deficit risk premiums in the US, but inflation is ultimately the indicator to watch.

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