Rates Will Still Rise, But Slower—Say Analysts

interest-rate-news Major economists expect Canada’s overnight rate to rise to 1.25% by year end—according to a Bloomberg survey. That’s down from a May projection of 1.50%.

(The overnight rate is currently 0.50%. This rate impacts prime rate, which in turn impacts variable mortgage rates.)

Here’s a summary of what the Big 5 banks are saying about interest rates now. The consensus still seems to suggest a 1/4 point rate increase at the next July 20 Bank of Canada meeting.

*******************

  • BMO:
    • “Assuming financial markets don’t seize up, we expect a 25 bps rate hike in July, though recent economic softness and uncertainty point to a pause in September.” [Source]
    • “That buzz you hear about a possible double-dip recession is legitimate and will remain a worry for markets the rest of the summer and into the fall.” [Source]
    • BMO’s forecast suggests a 50 basis point hike in prime rate by year end. [Source]
  • CIBC:
    • The flight to safety bid in bonds will fade if there are no significant outright sovereign defaults. (If right, this portends higher bond yields to come. – CMT) [Source]
    • CIBC feels the BoC will move the overnight target “higher by two or three more quarter point steps.  Thereafter, the Bank is likely to stay on hold until US conditions…are healthy enough for the Fed to be close to hiking.” [Source]
  • RBC:
    • “We look for the Bank to increase interest rates gradually as it becomes increasingly apparent that ultra-low interest rates are no longer required to support growth.” [Source]
  • Scotia:
    • Scotia suggests a 75 basis point hike in prime rate by year end. [Source]
    • “The Canadian economy is so highly integrated into global trade and capital markets that it is unlikely that we can significantly outperform other countries.” [Source]
    • Problems in Europe and the U.S. “probably won’t trigger the dreaded ‘double dip’ (recession).” [Source]
  • TD:
    • “Despite the significant slowdown in economic activity in April, we expect the recovery in Canada to remain on track.” [Source]
  1. I noticed that none of the banks said “sorry we grossly exaggerated the threat of rising rates during the spring market and pushed people into our much more profitable fixed rate mortgages.”
    That would have been nice.

  2. I liked what David has said. From my point of view it looks like this – The banks are singing the rate raising song as loud as they can. The fixed rates are being reduced quietly. Using legislation people are being pushed to fixed rate, as some of them do not qualify for the posted rate. The qualifying rate is still slow to come down @ 5.89%. No one is talking about variable rate mortgage now, but there are good discounts available now a days. It is extremely difficult to judge but I would say that BOC may let inflation go up a bit this time – given the present economic scenario – I’m guessing.

  3. I don’t want to be accused of defending the banks, because I’m not. However it’s not really fair to blame banks for thinking rates were going up. Almost every authority in the country thought rates would soar. Even the financial markets did not anticipate how fast the European debt crisis would unfold, until the last minute.

  4. Dave, (David L here)
    I respectfully disagree with your comment that “almost every authority in the country thought rates would soar.” Quite the contrary. Throughout that period there was lots of dissenting opinion from non-bank economists and analysts (and mortgage broker bloggers!) It’s just that their opinions were drowned out by the bank economists who, thanks to the media, were the loudest voices contributing to the sense of panic.
    As it turns out, they were wrong and by happy coincidence, they made a killing in the process. I just think someone needed to point that out.

  5. Dave L has it spot on!!
    I was trying to argue the case several months ago that rates were not going to shoot up and the majority of people on here laughed at me then. For someone to suggest that ‘nobody anticipated the European debt crisis’ then that person surely hasn’t been doing much reading over the last year. Its been blatantly obvious that the ‘recovery’ as it was deemed in the US and to Canada to a certain extent wasn’t a recovery at all, merely an uptick in economies while masive amounts of stimulus were pumped into them. Now that the stimulus has nearly run its course, there is very little to keep these economies from falling right back into recession. As a results, rates will likely end up LOWER than they currently are in 12 months time. Just my opinion of course but all the ‘ra ra’ and ‘have to lock in rates now’ cheerleading of just a couple months ago sure doesn’t look so bright now.
    Look at 5 year and 10 year bond yields in Canada. They are at the same level or LOWER than during the worst of the recession. That indates weakness ahead, whichever way you look at things.

  6. I’d be the first to admit I’m wrong but I just don’t remember hearing of any reputable analysts who said in March that rates would not go up.
    David, can you reply with a few links that show examples to this effect?
    I’m sure there were a few obscure people who publicly bucked the consensus, but they were very few and far between.

  7. Al I’d respectfully ask the same of you. Can you reply with links from reputable analysts who predicted in March that the European crisis would drive rates lower?
    I would disagree that it has been “blatently obvious” that the recovery did not have legs. Otherwise the bond market would not have sold off so much in the spring.
    I think we have to be really careful not to pat ourselves on the back in hindsight. When you actually have to make these sorts of predictions you never have the benefit of 20/20 vision.

  8. Dave,
    Looking back, I can recall that David Rosenberg for one subscribed to the view that interest rates would not rise quickly (he’s about as prominent as they come in Canada), and there were several others (CREA and CMHC also held that view as I recall). Basically the feeling was that with the US recovery far from certain, with China showing weakness and with Europe struggling on several fronts, that the Canadian Central Bank was unlikely to pursue an aggressive tightening policy in the face of such global uncertainty.
    I would also add that many US economists forecasted that US rates would stay at their current levels for an extended period and that also influenced my view that Canada could not increase rates by the 2.5 to 3% that the Big 5’s economists were predicting (John Mauldin is my favourite if you’re looking for a US point of view). The bottom line is that there was easy to find evidence to indicate that dramatic rate increases were far from a certainty, yet the Big 5 Bank economists lined up to echo that view, to their clear advantage and to the detriment of their customers.
    They had all of the same information (and much more) but still chose to make what I felt at the time was a totally self-serving forecast. You can argue whether or not they thought they were right, but if you follow interest rates daily I don’t think you can absolve them by saying that nobody was predicting a different outcome.

  9. “Al I’d respectfully ask the same of you. Can you reply with links from reputable analysts who predicted in March that the European crisis would drive rates lower?”
    What makes an analyst “reputable”? It is being right? Is it a degree from Harvard? Maybe being on the payroll of Goldman Sachs, JP Morgan or another one of the companies that ultimately own the Federal Reserve?
    Anyway, since you asked, here is a smattering of articles posted on Mish’s blog from early/mid 2009 contemplating Europe’s imminent banking system meltdown and his views on a so called “bond bubble” (as it relates to your questions about interest rates)
    February 2009: “US, UK, Eurozone Banks Face Meltdown”
    http://globaleconomicanalysis.blogspot.com/2009/02/us-uk-eurozone-banks-face-meltdown.html
    December 2009: “EU Ready to Bailout Greece; Debt Downgrades in Baltic States; Can Euroland Even Survive?”
    http://globaleconomicanalysis.blogspot.com/2009/12/eu-ready-to-bailout-greece-debt.html
    On interest rates:
    May 2009: “Nonexistent “pre-recovery” in Manufacturing Suggests US Treasuries a Buy”
    http://globaleconomicanalysis.blogspot.com/2009/05/nonexistent-pre-recovery-in.html
    May 2009: “Treasuries Massacred; Yield Curve Steepest On Record”
    http://globaleconomicanalysis.blogspot.com/2009/05/treasuries-massacred-yield-curve.html
    That last one is good because it links to several other articles going back earlier to support his case that worldwide, the economy was in much worse shape than anyone was letting on.
    I started reading him back in 2005 when he was even less reputable than now, predicting a US housing bubble as he did. I’ve mentioned other blogs and thinkers on the comment section of this blog previously. Mish is the go-to guy for the once preposterous case for a lasting deflationary recession/depression.

  10. I am in the same decision making process. Everyone seems to agree that as far as rate increases go in the next year or two, a variable rate is still the way to go; but if 2-3 months ago you negotiated a 5 yr. 3.95% fixed rate with your mortgage institution, like I did, things become riskier. I have to decide now whether to lock it or keep it at variable, without knowing what will happen in 3 to 5 years…

  11. I was faced with the same question back in March however mine was 3.74% for 5 year which I accepted because at the time I was in variable with no discount. That being said the spread between the fixed and variable was 1.49% which I still believe in a years time the fixed and the variable I did have will be the same even with all the hype about a double dip. If I had a variable with a discount this strategy would be looked at a little more, but keep in mind I don’t think you will see 5 year rates at these lows for sometime.

  12. I like Mish too but he is one voice in a sea of voices. He can be wrong too, just like all the other prognosticators vying for readership.

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