Rate Hike On June 1st, Market Predicts

Imminent-Rate-Hike Canada’s lowest-ever variable mortgage rates could soon be a fond memory…quicker than some thought!

11 out of 12 analysts polled by Reuters now predict a June 1st rate hike. (Minds change quickly. Before yesterday’s Bank of Canada (BoC) announcement, it was only 3 out of 12.)

Swap traders–who bet millions on interest rate direction–are pricing in a 93% chance that the BoC lifts rates on June 1st.

Speaking of which, check out the move on this baby. This is the 3-month overnight index swap (OIS) rate. It represents the expected overnight interest rate over a 3-month period. It’s been a long time since it’s ramped up like this.

Here’s what analysts are saying now about the Bank of Canada announcement and future interest rates:

  • "Removing the conditional commitment … (is) as good as cementing a June 1 hike…That leaves open the debate over whether 25 basis points or 50 basis points is likely." — Derek Holt, VP of Economics, Scotia Capital (Montreal Gazette)
  • “We anticipate gradual 25-basis point increases at each of the next five Bank of Canada fixed rate announcements through 2010.” — TD economist, Diana Petramala. (Globe & Mail)
  • “This statement marks a dramatic change in tone by the bank, and doesn't rule out possible 50 basis point moves." — Douglas Porter, Deputy Chief Economist, BMO Capital Markets. (CTV)
  • A “moderate growth track [will] allow the BoC to stick with only 25 basis point moves and to take a pause on rate hikes after October.” – CIBC Chief Economist, Avery Shenfeld. (Vancouver Sun)

The same analysts polled by Reuters above also predict a 100 to 175 basis point jump in the overnight rate by year end.  That suggests a 3.25% to 4.00% prime rate by New Years, give or take 25 bps. (Prime rate is 2.25% today)

More on the Reuter’s Poll

  1. It’s tough, but with all the hype of “maybe it’s time to lock in a fixed rate” I am actually leaning towards a variable. The banks have already jacked up fixed rates so that they are higher than when I got my mortgage almost five years ago.
    The question is how long it will take for the Bank of Canada rate increases to narrow the spread.

  2. I am a big fan of variable HELOCS, but even I locked in when we set up for our new house a month ago.
    I got 3.46 for 5 years with TD. At the end of the 5, I may go back to variable, but we will see.

  3. sticking with my prime minus 0.75% for the long run! The savings now will out weigh the losses later if the rates sky rocket.

  4. Boy am I glad I locked in at a 5 year Fixed Closed at 3.8% a few months ago. I saw the writing on the wall then and am only mad that I couldn’t get the 7 year rate that I was first quoted as it was really good as well. I see the next 5-10 years as high rates. That’s my guesstimate anyways.

  5. Canada has the world’s strongest currency right now, which for an exporter nation is not a good thing. The BoC will raise rates and then have to retreat when our economy starts to suffer. I don’t think locking in is a good idea.

  6. Prime = Overnight + 2%, there’s no law about this, just convention among lenders. Was traditionally only +1.75% until just a year ago when the sky fell and rates went so low that the banks decided it would be a good time to up their profits by increasing the “spread”.

  7. If your thinking about locking your VRM into a fixed rate, you will need to re-qualify at 6.1% or higher if you have less than 20% equity in your home, in order to qualify for CMHC coverage.

  8. “3.25% to 4.00% prime rate by New Years, give or take 25 bps”
    Give or take? What kind of prediction is that? Are you saying it could be anywhere between 3.0% and 4.25% ? That’s like saying “I am confident that by New Years the economy will decline or will improve”.

  9. Paul,
    3.25% to 4.00% is the range of forecasts from top securities dealers polled by Reuters. It is not CMT’s prediction as we try not to speculate on rates.
    The “give or take 25 basis points” represents the possibility that banks “give back” the 1/4 point they kept in December 2008. (At the time, the BoC cut rates 3/4 point and the banks only lowered 1/2 point.) We’re not holding our breath for that, but you never know.

  10. 4.6% or prime -0.5 (maybe -0.2) ?
    Even if rates go to 4% (i.e. +2% this year, which is not likely in my opinion – maybe 2011) – what will happen in later years, hard to predict.
    Looking back at history it seems that when the spread between fixed and variable is this high, fixed won’t go up much more for the time being either? Does anyone foresee prime -0.75 or more soon? I guess if I go with prime minus 0.2 / 0.5 – the break out fee will be pretty low as well.

  11. if the BOC increases rates arount 2% this year and the US increase is <2%, aren't we risking a Canadian dollar significantly higher than parity?

  12. Yes, I think that BOC is nuts to do this. Every country in the world wants the lowest currency (except Canada it seems?). We still have all this unemployment and so many businesses teetering on the brink. It just makes no sense at all. 70% of the GDP is driven by consumer spending, which is directly tied to people’s perception of their own wealth. Suppressing the real estate market will kill any recovery in a hurry.

  13. Interest rates in Australia have been up for some time now. They seem to be doing fine. The real estate market was also at its hottest before the crash — where were interest rates then?
    It’s not the BOC’s job to worry about the housing market. Keeping inflation down is the goal. An inflated housing market caused this problem in the first place. Interest rates going up to historical averages makes sense if the alternative is a consumer spending bubble.

  14. Hi Scott, You’re right that it definitely took some heat off the fire.
    BMO’s Doug Porter encapsulted the report by saying:
    “Talk of 50-basis-point moves any time soon should be quelled by these much milder inflation figures, which suddenly put core trends closer to earlier Bank forecasts. In fact, (Friday’s) report will even cast a flicker of doubt on whether the Bank will start hiking in June, although that still seems to be the most likely course, given the strength in the economy.”
    Source: Edmonton Journal

  15. Here’s a great way to cool off the market..tighten lending rules for home buyers, raise fixed mortgage rates while alluding to impending doom for variable rate holders then toss a little negative HST impact into the 2 hotest Canadian markets. All this posturing from the BOC and the banks should be enough. Perhaps Mark Carney will entertain 0.25 – 0.50% total rate increases in the next six months but no more than that.
    I’ve got 3 yrs left on my 0.6% discounted variable.

Your email address will not be published. Required fields are marked *

Copy link