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BoC Rate Cut? Huh?

I Don't knowMoney market traders are now placing odds at 60% that the Bank of Canada will cut its key lending rate by May 2012. Yes, you read that right.

That’s according to the latest implied overnight index swap (OIS) rates, as calculated by WestPac on Thursday night. (The OIS market is where traders bet billions of dollars on future rate direction. OIS prices are highly volatile and subject to change/error.)

Few economists currently agree that prime rate will actually fall in 2012. Nevertheless, this drastic change in market sentiment is a caution to not hold our breath for multiple rate increases.

At the moment, we’re witnessing an overwhelming consumer preference for variable-rate mortgages. Many other brokers and bankers are seeing the same thing.

This trend shows no sign of letting up in the short term and it clearly favours banks. That’s because banks have lower variable-rate funding costs than most (but not all) credit unions, trusts and non-banks.

If this trend persists, it could certainly boost the market share of aggressive deposit-taking lenders in the broker channel. Those lenders include Scotiabank, National Bank, ICICI, and Coast Capital to name some.

Rob McLister, CMT