The Rate Outlook Changes Little With Poloz & Co.

stephen-polozStephen Poloz’s first interest rate meeting as Bank of Canada governor is now in the books. The result: The Bank left the country’s core lending rate at 1%, which means prime rate will stick at 3%.

What the market really wanted to know, however, was what Poloz would say about the BoC’s rate hike bias.

As it turns out, there now appears to be slightly less urgency to raise rates down the road. The Bank’s key message was:

“Over time, as the normalization of…conditions unfold, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target.”

(“Normalization” of conditions refers to inflation back above 2% and growth back to potential, says Action Economics.)

Bank-of-CanadaThat said, Poloz clarified during his press conference that the BoC’s forward-looking language is not an attempt to signal a rate hike. It’s more of an explanation of how things may unfold if the economy performs as expected.

The Bank added:

  • “Total CPI inflation has [partly] been restrained by declining mortgage interest costs.” (But this factor will be reversed somewhat due to the recent jump in rates.)
  • “…Both core and total CPI inflation are expected to return to 2% around mid-2015.” (Rate increases will likely be moderate so long as inflation stays near or below 2%.)[Comments in italics are CMT’s.]

Prior to today’s meeting, the market expected 1/4 point of rate tightening by September 2014. Today’s announcement may push that back a bit.

The 5-year bond yield, which guides fixed mortgage rates, moved very little after the Bank’s announcement. It was at 1.66% at the time of publication.

The next BoC rate meeting is seven weeks away on September 4, 2013. That meeting will mark three years since the BoC last lifted rates.


Rob McLister, CMT

  1. Just came back from Scotiabank – they expect interest rates to inch slightly higher from now on – how fast/high/when exactly is anyone’s guess.
    I think if interest rates do go up it’ll be a slow gradual 1/4% game every quarter, starting maybe end of next year. Anything more drastic and panic sets in, real estate starts selling off.
    But, as long as people work the interest rates up to 6% are irrelevant, because we can all cut down on some discretionary items to give the bank a bigger slice of the pie (I probably buy $100-150/month in useless stuff we can live without – it’ll only hurt China manufacturing if removed).
    So, I think, go short and cheap on a mortgage – you get the best rate and best flexibility if you need to change it down the short road. The higher the mortgage the more it is true due to huge savings even a 0.25% lower rate generates.
    It is still beyond belief how many people with mortgages over 200K go with a 5yr rate
    (then complain how much banks rake in).
    Just my unqualified opinions I go by (saving me thousands on interest every year).

  2. David, David, hey, wake up, wake up (joking). I think the inflation is over 2% already, but our spinmasters are calculating it in a way that makes it “under control”. Add up the increases in the last year on all the stuff you and I always buy (food, gas, insurance, clothing, booze, vacations) and it all went up more than 2%. And companies give meagre wage increase of 0.5-1%.
    So, I am not sure I can trust official numbers when the heat sensors on my skin say “too hot”.

  3. Inflation measurement is continually tweaked and weighted differently per product to give a desired result. Hedonics, item substitution and other techniques used to sway the overall numbers by a few % plus their methodology can change each year.
    Partial list of recent changes done: http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getDocumentation&Item_Id=138267
    In short, the reported inflation number varies so much year to year that you can no longer make a direct comparison between them. There is a US website (shadowstats) that still calculates US inflation as they did in the 80’s/90’s and compares it to the reported numbers.

  4. Whoever took variable in 2007 or 2008, then renewed early in 2011 at Prime minus .9, those people hit the real jackpot on savings.

  5. Thinking about a early renewal now from at fixed 4.09% taking a 3 month interest penatly. Renewal is May 2014.
    My thought is taking a variable with minus .4. Is there anything better than now?

  6. What is everyone’s opinion on a 10 year fixed @ 3.69%? This is my first house and Im still young….I like the idea of having 10 years of security(even though I’ll be paying a premium for it) and feel its worth it?
    I know variable is lower and will most likely remain that way for maybe another year but I kinda want to set it and forget it…
    Thanks for your advice!

  7. You said : ” I kinda want to set it and forget it…”
    Then the 10 yr fixed term is best for you.
    It depends of many things though, that may make this choice cost you thousands more in interest compared to other, also safe options.
    My personal choice will be – the cheapest rate, regardless of the term :)

  8. 10 years is a long time. Your chance of breaking the mortgage is high. And if you break the mortgage before the 5 year mark, your IRD penalty can be very very, and I mean very very, painful. I wouldn’t do it.

  9. I think variable (BoC rate) isn’t going higher than current levels for longer …
    If it goes over 2% over the current level, many will bankrupt :) as the personal debt from lines of credit and HELOC is a substantial amount in general.
    So my thinking is Variable is still a good choice, but personally I would take 2 year fixed at 2.64%. And that is for my mortgage not yours :)

  10. i’m on a variable chris but i wouldnt suggest it for a new home owner…10 year fixed sounds good, altho i have never gone that long but what happens when you buy a house is that you get soooo many unexpected expenses and bills it would be nice not to have to worry about your mortgage…so, from this variable guy, go long buddy…as a football fan i always did like the hail mary…

  11. ouch, i hear u on them penalties..excellant warning shots there…got a little gun powder on my cheek….i shld have added dont go long unless yer sure you will like that house enuf to stay for the next decade. 2023 does sound like a long time from now. but that 10 year rate does sound enticing and you just know there will be other bills hitting you

  12. The IRD would only be applicable in the first five years. After, it is automatically three months of interest (0.9225%). If the loan is with a virtual lender, with no posted rates, I see very low odds of having to pay the IRD…

  13. If you like paying thousands more every year in interest go for it – but you need money for other stuff on a new house, so go with a 2yr rate at 2.69% at most banks. Do not listen to those who say you need security – they probably work for the bank. Interest rates are not going anywhere soon – save your money and go with a cheap rate. Listen to those who had a mortgage for a while. “Set and forget” is probably the stupidest advice I ever heard.

  14. I totally agree with you. For those looking to just have one amount every month, for a very long time, on their mortgage, 10 years fixed is not a bad thing. And as for that person certain that he’s going to break his mortgage somewhere in that amount of time? Well, I’d like to ask him if I can borrow his crystal ball.

  15. *raises hand ;-)
    Had a P-1.0 (probably bought down by my broker) but renewed in 2012 at 3.19 fixed. This is on a rental property. Still got a good P-.85 on my principal residence in 2011.
    I really enjoyed those 1% times though!

  16. Hi all,
    I have this issue of choosing whether I should go for variable 2.8. 2 year fixed of 2.95 or 4 yr fixed of 3.09. Which one is the best option at this current market situation

  17. Hi, I realize that it’s been awhile since this article was published but wondering if I could get some educated opinions..
    I have $100,000 left on my mortgage and hoping to have it paid off within 3-4 years max.
    My options are:
    2.19 for 6 mth term
    2.79 for a 3 year term
    2.99 for a 4 year term
    Can I get some opinions on what would be my best bet. I’m leaning on the 6 mth term, and thinking about the gamble, but all I hear is how the rates are going to increase and I’m thinking maybe I’m making a preposterous decison.
    Trying my best to educate myself, but to be honest, I don’t know much about the market or trends.. Thanks in advance!!!

  18. If you can stomach the uncertainty, jump on 2.19% for six months. Rates are probably going nowhere by next spring. If they do, you’ll renew at maybe 2.69% worst case.

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