The BoC Rate Meeting: Nothing to See Here

Non-eventToday’s Bank of Canada rate announcement was another yawner. No one expected rates to rise. Analysts merely wanted to see if the Bank would drop hints on its future rate-setting plans.

It did, but the new clues weren’t much different from its previous guidance.

For mortgage watchers, the long and short of it was this:

  • the Bank maintained its rate tightening bias, but
  • short-term mortgage rates (which the BoC controls) are unlikely to jump near-term.

The Bank’s outlook can largely be summarized in these snippets from today’s announcement:

  • The global economy remains “vulnerable to major shocks from the U.S. or Europe.”
  • In Canada, “…Underlying (economic) momentum appears slightly softer than previously anticipated…”
  • Our economy has a “small degree of slack”
  • “…The pace of economic growth is expected to pick up through 2013.”
  • “Over time, some modest withdrawal of monetary policy stimulus will likely be required…”
  • “It is too early…to determine whether the moderation in housing activity and credit growth will be sustained.”

Risk-and-housingThat last sentence is noteworthy. The Bank carefully crafts every last syllable in its rate statements. In this case, it is clearly reinforcing recent warnings that rate hikes are possible if housing-driven debt growth doesn’t taper off.

That said, ‘possible’ and ‘likely’ are two different concepts. With inflation undershooting forecasts and with future price expectations “well-anchored” (the BoC’s words), it seems unlikely that debt accumulation will move interest rates—at least not before the spring housing market gets underway.

The 5-year government bond yield (which influences long-term mortgage rates) was little changed by the Bank’s decision.

The next BoC rate meeting is in 50 days on January 23, 2013. By that time, we’ll know how one major economic risk factor plays out, the U.S. Fiscal Cliff.

Rob McLister, CMT

  1. Hi,
    I have a prime -.9% variable rate for 3.5 more years. If the Bank of Canada raises rates 1% next year, would I be better off locking in? I have a good job and we are reasonably well off if that matters.

  2. I’m in a similar boat…
    I think it’s VERY unlikely to go up 1% over the next year, especially as inflation stays below target:
    Japan had a decade of stagnation while the rest of the world was still functional. Who’s going to get the economy rolling now?
    You’ve got a great rate. You’re only paying 2.1% now, so a 1% increase would put you at 3.1%. At that point, you might still be able to lock in at that rate, but who knows with all the volatility? Keep an eye on the bond rates:
    What would it cost to lock in?
    I’d say wait and see where the markets go, but make your payments as if you were at 3.1% now (which is still amazingly low!).

  3. You have a great rate and in the unlikely event that prime goes up by 1% over the next year, you would still be competitive with market rates. In addition, you will be paying off more principle on your current mortgage than a current fixed mortgage which is higher (around 2.99 % for the best rate).
    Most people who are buying or refinancing now are going with fixed as they are so low but in your case I would keep your current mortgage.

  4. -.9% that’s a great rate! Very unlikely that prime will go up by 1% in the next year. I currently have -.75% for the next 4 years and I have no intention to lock it in. If the discount made your rate closer to 2.99% I would say lock it down, who needs the stress for a few bucks. But for now enjoy the savings and make sure to pay higher payments in order to reduce your principal.I worry for the families who can afford their mortgages with their current discount but will find it very difficult when they will have to renew their mortgage at a hire rate. Unfortunatly I believe that our current discounts will no longer be around when our mortgages come due.

  5. Do not touch your variable rate, it’s the best choice for the moment at Prime minus .9.
    Whenever (if ever) rates eventually start going up, you’ll have enough time and plenty of choices.
    Rates don’t rise with 1% quick usually.
    I personally think the BoC rate will stay low for at least another 2 years.

  6. If Prime – .9% was available today, I would be putting almost all of my clients into that. I am expecting rates to stay low for 1-2 years, perhaps 0% – .5% increase in the prime rate between now and 4th quarter 2014.

  7. I doubt that you’ll see a rise of 1% in the next year. Maybe a quarter percent, but many say prime will stay put for a while.
    If you’re locked in for 3.5 more years, your penalty will likely negate any savings you could save by locking in. Plus, if you’re at prime – 0.9%, that means you’re at 2.1%. Best fixed you’ll get at a bank is about 3.19% while you can get 2.99% or so with a broker. By the time the rates rise, you’ll have saved enough to cover you.
    Stick with it.

  8. OMB said, “Best fixed you’ll get at a bank is about 3.19%”
    Sheeesh, now we have a broker lying about “bank’s best rate”. why not go for broke and quote bank’s posted as best rate next time?

  9. I interpreted OMB’s statement as saying you’ll get 3.19% if you lock in your current a variable rate with your bank. That is pretty accurate. You will never get the best rates when locking in with your bank because the bank knows it has you by the short and curlies.

  10. IG#1 & OMB,
    You are sadly mis-informed about a a instituitions position on converting a floating rate into a fixed term…
    The renewal and early renewal of a mortgage is the most profitable mortgage transaction for a lender as they do not incur: underwriting costs, property valuation costs, origination costs and often this nullifies any exisitng trailer fees on a product. With this in mind lenders are very aggressive with retention pricing.
    Negotiating with your existing lender does not create us mortgage proffessionals a pay check, so I understand your desire to mislead consumers… I just don’t support it!

  11. That is just plain rubbish. Banks know that you don’t want to reapply and pay a penalty to go elsewhere. Why on earth would they give you their best rates on a conversion??
    The Bank of Canada published a study that shows how much people pay by being loyal to their bank. I wish I had the link because it’s a hefty difference.

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