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Growing Rate Cut Speculation

Falling-Mortgage-RatesSince August, financial markets have been pricing in at least one Bank of Canada rate cut (according to overnight index swap yields, which reflect rate expectations).

Economists, on the other hand, have hung on to their rate hike forecasts for dear life. Most analysts still predict that the next BoC move will be a rate increase in late 2012.

Now, we’re starting to see some economists let go of those predictions.

BofA economist Sheryl King is the latest example. She’s looking for the overnight rate to make a round-trip back to 0.25% by early 2012. That would peg prime rate at 2.25% if banks pass along the full cut.

David Madani, an economist at Capital Economics, is looking for a half point cut by April or June. “Even if we are wrong,” he says, “the broader message remains that interest rates will remain unusually low for a very long time.”

King and Madani join Goldman Sachs as being the most vocal rate cut forecasters.

Mortgage-Rates-3If they’re right, then as we noted on Monday, variable rates could continue outperforming 5-year fixed rates over the next five years. That’s true even with the stingy discounts from prime being offered at the moment. (Nationally speaking, variables are averaging a measly prime – 0.25%, or 2.75% today.)

Poor discounts aside, a minority of borrowers today are willing to make a bet that rates stay flat or drop over the next 1-2 years.

“I almost expect more people to jump into variable given the long-term interest rate environment looks so benign,” says Sal Guatieri, senior economist with BMO Capital Markets.

(Source: FP, HuffPost)

Rob McLister, CMT