Bank of Canada Leaves Key Rate Unchanged

Bank of Canada As was widely predicted, the Bank of Canada left its key lending rate unchanged at 1.00% for the sixth consecutive meeting.

A survey of 22 economists conducted by Bloomberg News prior to the rate decision found them unanimous in predicting this status quo.

The holding pattern on rates has been welcome news for variable-rate mortgage holders, with the prime rate remaining at 3.00% since September.

Here are highlights from the BOC’s official statement released today:

  • “In Canada, the economic expansion is proceeding largely as expected…”
  • “…Financial conditions remain very stimulative.”
  • “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn.”
  • “…high (commodity) prices, combined with persistent excess demand conditions in major emerging-market economies, are contributing to broader global inflationary pressures.”
  • “…total CPI inflation [will remain] above 3 per cent in the short term…[and] converge with core inflation at 2 per cent by the middle of 2012…”

The next interest rate decision is scheduled for July 19, though most economists believe the Bank won’t resume tightening monetary policy until September or later.

The financial markets are looking even further out. Overnight index swaps (OIS), which are widely followed derivatives that track Bank of Canada rate expectations, are not fully pricing-in the next rate increase until February 2012 (Source: Westpac). That’s changed radically since March when the OIS market expected a July hike.

At the recent Dominion Lending Centres conference, CIBC economist Benjamin Tal talked about the OIS market. He said that while OIS is not a great predictor (because it changes frequently), it’s more accurate than economists’ consensus forecasts.

Tal also explained that a “normal” Bank of Canada policy rate is 3.00-3.50% (versus today’s 1.00%). “The question,” he added, “is whether or not this 3.00-3.50% is reached in 2012 or 2013.

“I think it’s a 2013 story,” he said.

Steve Huebl and Rob McLister, CMT

  1. As of end of business today, the OIS market is pricing in the following rate hike probabilities:
    July, 13%
    September, 33%
    October, 57%
    So looks like expectations have moved up a bit (to October) from the surprising January hike that markets were pricing in last week.

  2. Hi Gary, That’s right. When the overnight rate eventually starts climbing again, the odds heavily favour 25 basis point increases over 50 basis points. We’d likely need a severe and sudden inflation concern to get one or more half-point hikes.

  3. Honestly, after this summer shows a significant slowdown in Canada’s GDP and terrible numbers coming out of the US and Europe, I don’t think a rate hike is in the cards well into next year.

  4. There is a good Globe and Mail article today titled “Rate hikes okay for most but a ‘financial shock’ for many” that is worth reading
    The Globe article above refers to latest report from TD Economics that is full of good info on how rates have effected consumer spending and the overall economy. BNN also did a related interview with TD chief economist

  5. I don’t think we’ll be seeing a 3% target rate by 2012. Even to reach 2% by next year we’ll need to have four increases of 25bp which for now doesn’t look like it’s going to happen. 3% by 2012 is highly doubtful unless inflation really spikes which is unlikely. As long as U.S. remains anemic, rates in Canada will remain low. This is not to say, however, that we may not see increases. But even a 2% target, 1% higher than today’s rate, is still quite low. Interest rates will be low for some time.

  6. Hi Dan,
    You’re right that sentiment shifted a bit after yesterday’s BoC meeting.
    The day before, traders hadn’t considered a rate hike to be “certain” (100% implied probability) until February 2012.
    The tone in the OIS market then got briefly hawkish after the BoC’s statement, perhaps overly so. That moved forward rate hike expectations and the market fully priced in a January 2012 rate move.
    After today’s ISM report and technical damage to US Treasuries, Traders may shift expectations back to February.
    As this illustrates, OIS implied rates (which reflect real-time market perceptions of BoC policy) change constantly. Short-term fluctuations are virtually meaningless from a mortgage selection standpoint. We report on them only out of an interest in market psychology.
    More relevant is the overall trend which implies a decent chance that rates could stay low for a while. Depending on the client, that longer-term outlook can sometimes have implications for mortgage term selection.

  7. I know all the financial wizards out there will dump all over me but the low interest rates are the one time — perhaps ever — that the common folk can have fun and gloat whilst the banking people and their flacks whine about the need for higher interest rates….sure this period wont last much longer but us common folk enjoying the heck out of it…so poof to the banking community…

  8. The OIS markets priced out even further after yesterday’s bloodbath in the markets, fresh numbers are:
    July, 8% probability (down from 13%)
    September, 24% probability (down from 33%)
    October, 49% probability (down from 57%)

  9. Dan,
    Can you point me to a website where I can find those probabilities? I’d love to be able to follow them as I decide when to jump off the variable rate ride. Thanks.

  10. Hi Ryan & HL,
    Perhaps Dan or someone else has a good site. We’ve never been able to find a good online source apart from Reuters’ Bank of Canada-related stories. For CMT’s numbers, we subscribe to Westpac’s Monetary Policy Watch service.

  11. Hi guys,
    It’s actually not a website that I use to get those BoC rate hike odds from the OIS market – I’m on a daily market email distribution at the bank I work at.
    If you give me your email addresses I can put you on auto-forward to receive those OIS odds daily.

  12. Hello Dan,
    Like Ryan and HL, I was curious about your knowledge of the BoC rate hike odds from the OIS market. Having a variable mortgage rate, this would be helpful! Would you mind adding me to the list of auto-forward emails addresses?
    Thanks for sharing!

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