Rate Outlook Clear As Mud

"The fact is we're three years in to the global financial crisis and its dynamics still dominate the economic outlook." – BoC chief, Mark Carney 

Rate-uncertainty The question everyone wants to know is: How long will that be true?  The answer, which is as ambiguous as ever, has a direct bearing on the mortgage rates. 

As always, we can count on the “professional predictors” to have an opinion. Here’s a sampling of what they’re saying now, following a week that brought the third consecutive BoC rate increase and an anemic employment report.

The economy will have to worsen further "to prompt the central bank to stop raising rates." – BMO Capital Markets, deputy chief economist, Douglas Porter (Ottawa Citizen)

“…The (Bank of Canada’s) language suggests the bank may pause longer than merely the next meeting or two." – BNY Mellon strategist, Michael Woolfolk (Global)

"In our opinion, the odds favour the Bank of Canada pausing for some time…TD Economics does not anticipate another tightening before March of next year." – TD Chief economist, Craig Alexander (CBC)

“…The bank (of Canada) doesn't know what it is going to do.” – CIBC World Markets Chief Economist, Avery Shenfeld (Vancouver Sun)

“…Rates are low and likely to rise at only a gradual pace in the next 18 months…” – TD Chief economist, Craig Alexander (Globe & Mail)

Do you get the sense that no one really knows where rates will be 12 months from now? If so, you’re right.

But that matters less than one might think.  TD’s Craig Alexander told the Globe’s Rob Carrick this week: “Rates are remarkably low by historical standards. People get so hung up on the direction of interest rates. The level matters.”

Translation:  Today’s 3.59%-3.79% five-year fixed rates are manna from heaven.  So are 2.90% three-year fixed rates and 2.30% variable rates.

Rates are so good in general that most people don’t need to drive themselves to insanity while choosing between fixed or variable rates. As long as you don’t borrow over your head, your finances won’t be decimated by making the wrong choice.

  1. I think it’s pretty clear that the BoC really, really wants to raise rates. So I think they just will continue to do so.
    I believe the current Canadian stance is that we’ve done so well why blow it now? Let’s raise rates to cool off an overshoot and prevent a bubble. It might be too late to do that now, but keeping rates low will ENSURE that a bubble is created, so there’s no risk it rising rates now.
    When the fire gets too big, you HAVE to but a bit of water on it, even if you risk putting the fire out. When the fire is hot, you can’t risk it getting out of control even if you want to keep it burning.
    So I say, next chance, another rate increase…only for the fact that the bank wants to send a clear message. While forecasters will predict a 50/50 chance of a rate hike, this next one is going to “shock” borrowers and give them a clear message.
    If I get this one right, rank me as an expert rate predictor and give me my rank!

  2. Central banks (at least the well functioning ones) do not like shocking markets if it can be helped. They’re usually careful to telegraph their thinking well in advance of interest rate announcements.
    They have been consistent in acting to meet their interest rate target, and will almost certainly act accordingly in the future.

  3. For the good of us all, I hope the BoC continues to raise rates to the historical average and that fixed rates head in that dircetion as well. I am pleasantly surprised to notice that borrowres seem to have got the message and aren’t rushing to buy homes – I hope this keeps up!

  4. Shock my be a bad word, but I do think they need to keep raising rates to set a strong tone. If they don’t keep doing it, borrowers wont wake up. There are a lot of people sleeping at the wheel.

  5. Pretty obvious that the BofC has decided to stop raising rates for the next few months at the very least. From the wording of their latest announcement you can tell very easily that the economy has changed far more dramtically (for the worse) than they envisaged previously. The rest of the Western economies stopped raising rates already (or never started yet) so its unlikely Canada would go it alone in the face of such an obvious slowdown. Housing market in Canada has already begun self-correcting. Prices are down a few percent already and sales and listings are down across the board.
    Once the BofC gets an idea of how dramatic this world slowdown is and how its affecting Canada going forward (will our jobs numbers rebound or is the recent falloff going to continue) then we’ll see them move back to a tightening mode. Until then, expect no changes to rates till likely Q1 or Q2 of 2011.
    Just my 2 cents based on BofC commentary.

  6. Historically and based on their written mandate, I would say that you are right and that inflation is the best number to look at – trying to hit the 2% mark. However, I think this time is different and a clear signal will be sent to borrowers. So one more rate increase minimum to send that very message. The only exception is if the bottom falls out of something before then. If things stay more or less the same, one more to go!
    My view is going to be in the minority in view of the economists, but I’m confident.

  7. I think you will be wrong about the next time they will hold the rate. The U.S. numbers are so bad that Canada can’t afford to raise rates at this pace . They have to be careful because unemployment rates also rose slightly in Canada after the last report.

  8. I think your right on Chris as I think the government themselves are worried about people over extending themselves in this low rate environment. The finance minister himself has commented on this and I wouldn’t be surprised if they throw more cold water on the fire that is burning before it gets out of control. It was reported today that foreclosures are up approx 3X what they were last year. With ultra low rates this will only get worse.

  9. I agree, as long as core inflation doesn’t dip below 1% they will continue to hike. To be honest, I think they would continue to hike with inflation between 0 and 1% too, as long as its not negative.
    As much those making an argument for stalling the hikes would have you think, I don’t think the BoC puts as much emphasis on the world economies as they would have you think.
    Things also seem to be “different” in Canada, kind of going against what others are doing, and I think the BoC realizes this.

  10. the other important factor to consider is where this rate tightening cycle ENDS. In the modern interest rate environment (I’m talking the last 25 to 30 years), each rate cycle has pretty much ended up with a LOWER top rate than the previous one. In other words, looking at a long term trend, rates are going DOWN.
    Now, whether they pause at the next meeting or whether they hike once more before pausing doesn’t really matter too much.
    What is vital is where do the rate hikes top out and that level may well be lower again than in the previous rate hike cycle. That wil be the real interesting one.
    If the world economies do deteriorate again next year or the year after and assuming Canada has managed to raised rates a bit further, they may end up topping out at just a few percent, rather than the higher rates most Economists seem to expect. The next recession (and we all know there will be one, its just a matter of how long) will be interesting to see how much ammo the Central Banks have left in which to lower rates again. If they haven’t been able to raise them much, then they will be in big trouble. I’m thinking primarily the USA here and maybe the UK.
    Interesting times.

  11. Hi Rupert,
    Thanks for the post. You’re definitely right about rate cycle peaks getting lower and lower.
    Moreover, there’s no indication that cycle peaks will start a long-term trend of getting higher and higher.
    You’re also right that:
    * The level rates top out at
    * How fast they get there
    * How long they stay there
    …are all vital from a rate modelling perspective–more so than if the BoC will hike one more time this year.

  12. I have 60% equity in my home. With a mortgage balance of 110k. I need to renew and am struggling with variable versus fixed. I currently have prime less .7 on the table (over 5). What should I do?

  13. Great point! I’ve long been saying that a new “normal” rate will emerge out of this recession, but thanks for quantifying the chances of that.

  14. Have you considered a 3 year rate of 2.90%? It is an amazing rate for a fixed mortgage and prime would only have to go up twice to put you ahead.

  15. hi, I have 40,000 left on my mortage. I have a variable rate at 2.4 (.6 below prime) and maturity date July 2013. should I lock in? I have options for 3 years at 3.55 and 5 at a little higher. thanks

  16. Interesting. I hadn’t thought of that.
    The lower trending rate probably has to do with the ever increasing debt loads as everyone piles on more borrowed money as it gets added into the economy. The government debt burdens so forth. I suppose it would makes sense to keep it at somewhat lower level historically just to keep the economy from faltering again. Maybe the natural evolution of capitalism requires this?

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