The Rate Increase Cycle Begins

Bank-of-Canada-Rates For 13 months, Canadians have enjoyed the lowest interest rates of all time. But the party had to end eventually.

Today was that day, as the Bank of Canada (BoC) raised its key lending rate by 0.25 percentage points.

If lenders raise prime rate by 1/4 point, as expected, homeowners with variable mortgage payments will see roughly $12 of monthly payment increase per $100,000 of mortgage.

Other highlights from today’s BoC statement:

  • “Activity in Canada is unfolding largely as expected.”
  • “The spillover into Canada from events in Europe has been limited to a modest fall in commodity prices and some tightening of financial conditions.”
  • “Household spending is expected to decelerate to a pace more consistent with income growth.”
  • “Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

That last point, and the bond market’s muted reaction to this news, suggest that another rate hike on July 20 is far from certain. (Bond yields are down considerably today, largely because Euro-concerns have traders flocking to safe investments.)

The pace of rate increases going forward will depend heavily on global growth and the resolution of Europe’s debt problems.

As of yesterday, Big 5 bank economists were suggesting (on average) that prime rate will rise from today’s 2.25% to roughly 3.25% by year end.* By the end of 2011, their forecasts imply a 5% prime rate. But those estimates will change as weeks progress, as they always do.

On a positive note, the BoC also reassured Canadians in its statement. It said, "This decision still leaves considerable monetary stimulus in place.” Variable mortgage rates, for example, are still under 2%.  That’s just a tick above their all-time bottom.


* Source: Mean average of the overnight rate change forecasts published by BMO, CIBC, RBC, Scotia, and TD—as of May 31, 2010.

  1. The most interesting bit from the accompanying statement was the note that “Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”
    In other words, this is not necessarily the start of a steady rate-hiking cycle.

  2. I have to agree with al R. We will have to see more 6.1% GDP growth rate numbers to justify the hikes. Otherwise dollar will spiral up out of control.

  3. This is all good. Because we’re ahead of others (and especially the US), rate increases support a stronger dollar. This makes them more effective both in moderating growth and in controlling inflation.
    Now, the question for me, is when we can get back the 50 basis points banks added to the spread between prime and the BoC rate… (And perhaps related: when do the stubbornly high LOC rates come back down to prime …)

  4. I still think overall rate hikes for the year will total 1-1.5% as stated here in earlier blog posting.

  5. Wow. Carney totally played down Canada’s economy. It looks like the real rate moves will start in September. I can’t see how they wouldn’t. Our economy has had two quarters in a row of blowout numbers. The Europeans will get their house in order soon enough. Then it’s off to the races for interest rates.

  6. SL
    i have approval with 3.60% interest rate fixed for 5 yrs, still i m thinking its good to go with it or try hybrid mortgage (50/50).
    After today’s hike.

  7. Chris, that’s exactly what I want to see to. My LOC rates got changed to P + 1 last year. Hopefully it’s not going to be higher than P +0.75 as P increases.

  8. Hi,
    posting again..
    I have approved interset rate with 3.60% and I m confuse, should I go with it or do hybrid mortgage and split 50/50.
    Some one can guide me on this closing is near.

  9. When the BoC was lowering the rates, I recall there was one (or two?) rate reductions that were not entirely passed on to the consumer (in the form of a reduced prime rate).
    Do they hope we forgot or will they be generous and not pass on an entire increase as the BoC starts their rate increases (not holding my breath)?

  10. My sense is that this rate hike flight will be short. It wouldn’t/shouldn’t have taken off, had Mr. Carney not committed to it so early (recall statements from Q3’09).
    Historically, however, BoC has not done any hikes less than 125 bps, and typically does 175 bps over 16 month span (Source: David Rosenberg, Gluskin Sheff).
    This time it may set a new record for short flight (see Australia).
    Personally though, I am hoping that real estate buyers don’t get carried away again (knowing/hoping that rates wont rise), as the RE bubble is only at the risk of getting bigger.
    As they say, it is better to take early action to the problems, than hoping that it will go away over time. It only gets worse. listen up Europe!!

  11. As Rob & Melanie and other mortgage brokers would (or should) say: it all depends on your situation.
    3.60 for how long? — If for 5 years, that’s very good. Although an aggressive early pay down on the variable part of a hybrid at prime – 0.5 or better may still save you a little money, it’s not going to be a fortune.
    Have your broker run best and worst case scenarios; in the end, based on those numbers, you have to decide if you want the safety of a fixed rate or if you are able and willing to risk the hybrid.

  12. Hi Sandip,
    Thanks for the note. Chris is exactly right. No one can really advise you without knowing your full borrower profile. However, it’s safe to say that 3.60% is an tantalizing 5-year fixed rate. More often than not I’d be inclined to stick with that versus going variable in today’s rate environment. That assumes that this particular product is the right fit for you. As always, be wary of any restrictions, like fully closed terms, lack of adequate pre-payment options, harsh penalties, etc.

  13. Question.
    I have a Prime + .8 variable rate mortgage. I can lock in now at 4.59% for 5 yrs. I have been leaning towards locking in. Any thoughts?

  14. Actually, Carney did not commit to raising rates early, he did the opposite. He made a conditional pledge to not raise rates prior to July 2010, depending on inflation.
    Well . . . inflation is here, and so he has raised rates. Where’s the confusion?
    I’m not sure how he could have done anything else. If you are concerned about a real estate bubble, why in the world would you say that he should not have raised rates? To the extent that a bubble exists, it is the low rates are what is fueling the real that are driving it.

  15. wow, there seem to be a lot of people on here looking for free and easy mortgage advice. consult your yellow pages, friend.

  16. I did. And I met with an advisor yesterday. I was just wondering what people here thought. Thanks for being so helpful.

  17. Bob .. you are right in that Carney committed to stay put until mid-2010, but he said this in an environment of recovery, which clearly signaled that rates are potentially rising from mid-2010.
    Where do you see inflation concern?? the last print was 2.1% which is higher than previous print but it is well within the target range of Central Bank. Look around, it is a deflationary environment (oil is steady to going down, automobiles are down y-o-y, wages are not growing).
    Regarding RE bubble, my point is that the shortness of this rate hike will not cause the RE bubble to burst (as previously hoped). In fact, bond market will (as is) see through it (in laymen terms, anticipate that BoC’s ability to raise rate is very limited in current environment) causing RE bubble to continue to expand.

  18. Patiently waiting . . .
    Huh? You think this is a deflationary environment? I think you misunderstand deflation. When wages don’t increase, but costs of buying things do increase, that’s inflation.
    I’m not sure where you are getting your information, but in the last StatsCan Inflation Report it noted:
    – Energy Prices rose 9.8% in the last year
    – Gas Prices rose 16.3% in the last year
    – Natural gas prices are no longer exerting downward pressure, and are 3.3% higher.
    – Vehicle prices rose 5.3% in the last year
    – Vehicle insurance rose 5.6% in the last year
    – Overall, 7 of the 8 major components of the CPI recorded price increases in the 12 months to April. The only category that did not was clothing and footwear.
    And all of this, as you noted, without wage increases. That can hardly be called deflationary.
    – Core inflation was 1.9% y.o.y, which is within the BoC target range, but it has steadily been rising so it seems appropriate to put brakes on before it rises above the target rather than after.
    Link to latest report:

  19. If all your advisor offered you was a 5/yr fixed closed at 4.59% you can definitely do better if you shop around a bit more or use a broker.
    Did your advisor tell you there was Prime -.60 available in the broker channel as well?

  20. Yes, we talked about the new variable rate at -.6, thanks.
    I was just wondering what thoughts were surrounding the 4.59%. Looks like BMO lowered theirs to 4.25% now too. I’m going to talk to my broker today.
    Thanks for your thoughts

  21. I don’t think rates will rise continually into the future. The world economic situation is very fragile right now and things can change in a hurry. I think that the big banks are fear mongering and trying to get people into fixed mortgages. The variable is still the way to go and it has proven to be a better bargain for consumers. People are getting paid to tell you to lock in and that rates will continually go up. Its not just the Canadian economic numbers you have to look at but the world economy in general.

  22. Hi Concerned,
    Thanks for post. We ran a story a while back showing how prime rate could rise 3% and variables would still outperform 5-year fixed terms (based on various standard assumptions).
    So I’m with you in that variables can’t be dismissed. On the other hand, there’s no such thing as one term that’s right for everyone. Advisors still have to ensure a borrower is well-suited to a variable before making that recommendation.
    As a side note, if you have a good-sized mortgage (~$200k+) and you think prime will rise over 1% in the next year, then a 1-year fixed often presents even better value than a variable.
    Cheers for now,

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