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

  1. Good news for my P-0.85, likely bad news for the state of the economy.
    C’mon EU, get your act together and you and yours will stop weighing so heavily on the markets/economic growth.

  2. Isn’t anyone fed up with the genius economists and their behind-the-curve predictions?
    The entire world economy is at the brink -again- and up to today they have been predicting a rate increase. Good grief.

  3. So I’ve managed to save a few thousand in my bank, my mtg is P less .90 and began in July…is it better to throw the lump now (while rates stay low) or keep saving and at sign of hike throw down a prepmt?

  4. Hey John mccrae
    bang on brother…i think the economists predicting a rate increase need to give their head a royal shake….

  5. Do the latter, pay off the debt when rates rise, so long as you can be responsible in banking the savings. Even better would be to invest in 4-5% corp bonds or preferreds until rates move up.
    This is the same thing as buying stocks on the way down, selling on the way up. Unfortunately, most people do the opposite.

  6. just this week I read a article here on “variable all but dead”. now maybe a lower variable and now “most people will jump into a variable” . It all leads to the fact that all the “economists” out there have no freakin idea and are guessing. get the lowest rate you can through a broker and stick with it IMO

  7. Mark P:
    In the end it really is all a guessing game. It doesn’t matter how many degrees one has or designations, trying to predict where the markets will head is impossible. We know by looking at history that in the long run the markets recover and assets appreciate. But the last 3 years have been anything but normal and that’s why it’s more difficult than ever to forecast where interest rates may head.
    That’s why I have said repeatedly that people should stick with what suits them best based on their risk tolerance and not choose a flavour of the moment type of mortgage. Three months ago it was go variable because it was prime – .90%. Now more brokers are recommending to go fixed given how attractive the risk premium is. To the consumer, it’s all quite confusing. I say if you always got a fixed rate, stay in fixed and if all these years you opted for variable stay in variable. Variable rate mortgages always carry a higher risk but historically have been priced lower than fixed rates.
    I’m actually somewhat worried that fixed rates are this low the people who lock in now for a few years may get a sense that these rates are the new norm. Should rates climb to more realistic levels in four or five years, there’s going to be people out there who would see their payment amount increase, perhaps significantly in some cases. This, in my view, is why it’s important to prepay the mortgage while rates are low so that when rates do move back up again, the balance will be lower and it will be easier for borrowers to transition from low-rate/low payment to more normal rates/higher payment.

  8. This, in my view, is why it’s important to prepay the mortgage while rates are low so that when rates do move back up again, the balance will be lower
    This is bang-on — this is something of a “golden opportunity” moment to pay down principal through pre-payments and reduce the sticker shock when rates go up. Too bad more people aren’t doing this.

  9. Capital Economics is also the same company that has predicted a 25% drop in our Canadian R/E market… for 2 years in a row. So if you think about it, the second prediction should really be about 30% because the market went up 5% since their original prediction.
    I’m done with speculating.

  10. Lior,
    With all due respect, ignoring spreads and mortgage lifecycles teeters on irresponsible. I would encourage my fellow brokers to not simply recommend the mortgage that people have “always got.” Making conclusions about “what suits” a client requires substantially more analysis than that.

  11. A rate cut should come as no surprise. Both the ECB and Australia recently thought it was a good idea.
    Real estate will continue to out-perform most other assets in this ultra-low interest rate environment, despite the endless musings of the bubble-heads.

  12. Rob,
    I know I am bad, but we need to laugh. (yes, it is an old story)
    Now’s a good time to lock in a mortgage
    ROB CARRICK | Columnist profile | E-mail
    From Thursday’s Globe and Mail
    Published Thursday, Oct. 25, 2007 12:00AM EDT
    Mortgage rates have hit multiyear highs, and there could be worse to come before things settle down.
    Call it yet another example of collateral damage from the problems in the U.S. subprime mortgage market.
    Simply put, it’s costing banks and other lenders more to raise the money they use to finance mortgages, and they’re passing the cost on to people buying homes and refinancing existing mortgages.
    That’s why the posted major bank rate for five-year mortgages is as much as 7.44 per cent right now, which is the highest level since May, 2002, and why new variable-rate mortgages are becoming more expensive almost by the day (existing variable-rate mortgages are unaffected).
    Alex Haditaghi, CEO of, said his contacts with bank representatives suggest that fully discounted five-year rates could go as high as 6.5 per cent from their current level around 6 per cent.

  13. I love all these people who come on here and try to look smart in hindsight, claiming they’re not surprised that rates didn’t go up like 95% of people expected. Try making your predictions at the time instead of after the fact people. Then we’ll see how smart you really are.

  14. People’s expectations are based on media info mostly, that’s why they are wrong sometimes. Very few have the information that really sets the rates.
    Prime minus .9% variable, or 2.99% fixed – you can’t go wrong with both.

  15. You can put 10 economists in a room and still come with 10 opinions. The world is at a saturated point in regards to consumer goods. The only thing that will save the banks and corporations is a global war. Otherwise, the little guy can be on top for once. Even if houses are overpriced, the rates are low enough that a dishwasher dad and a Tim Hortons mom can own a Mattamy Home in Markham. If the rates go up, and here is the dirty little secret, people can begin walking away from homes in Canada. Europe is the sick old man, America is lucky because everything is pegged to their dollar, and China is talking about “trade wars”. We’re in a super power transition right now, and only the Europeans can see that.

  16. We also don’t live in times where people use to buy, hold, and sell. With day time traders, speculators, and house flippers, nothing fits the old ways of thinking. A lot of what happens in the market is a legal Ponzi scheme. Look at gold, real estate market and oil for example. The only thing that they can predict is the breaking point/threshold of the everyday consumer using income stats. The rich are buy Hermes bags, while the so-called middle class flick through the flyers to get the best deals.

  17. ECB and RBA rates were higher so the they had more room to maneuver. Australia only recent began to cut rates (by 25 bps) after 7 consecutive increases. Their benchmark rate is currently 4.5%, Canada is no such position as the BoC’s current benchmark rate is 1%. While no one is ruling out a rate cut by the BoC if things get worse, it’s not going to make much difference if unemployment continues to increase.

  18. I guess that’s where me and you differ. I prefer to focus on the client’s level of risk aversion which doesn’t really change. People who are conservative with their finances and want the security of a fixed rate will almost always take a fixed rate and pay the premium for that protection. The same goes for individuals who are typically opt for a variable rate mortgage. While some would definitely be converting to a fixed rate now that the spread to prime has narrowed and fixed rates continue to hit record lows, others would ride it out. And for all we know, luck may come their way when the BoC cut interest rates by 25, 50, even 75 bps and provided the banks pass the discount, variable mortgages would once again hit closer to 2%. See, the turmoil that we have seen in the markets over the past two years has never really been experienced before. There’s no manual for it. Even central bankers openly said the policies they are exercising these days are pretty much open territory. Monetary policy has become an experiment. I’d rather focus on what I can control rather than what I can’t. Indeed, history does provide some guidance, but in today’s times we’re pretty writing history.

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