The BoC Abandons its Rate Hike Bias


Two years ago the Bank of Canada (BoC) predicted 2% inflation and normalized growth by the end of 2013.

Three years ago the BoC predicted 2% inflation and normalized growth by the end of 2012.

Four years ago the BoC predicted 2% inflation and normalized growth by the end of 2011.

Now, the BoC predicts 2% inflation and normalized growth by the end of 2015.

Do you see a pattern?

Today the Bank threw in the towel and stopped hinting at future rate hikes. (One less prediction to get wrong.) It had held that rate hike bias for 18 months.

Why can’t the BoC get it right?

Well, as Governor Stephen Poloz put it, “Policy is dependent on the data flow.” And the BoC is using similar data as everyone else—much of it backward looking.

As one such example, Poloz noted today that:

…slower growth in household credit and higher mortgage interest rates point to a gradual unwinding of household imbalances.

But interest rates are not predictive data and increases can be fleeting. We’ve seen that lately with 5-year swap rates (which influence fixed mortgage rates) already giving back 50% of their summer increase.

(Click chart to enlarge)

As it stands, inflation lies just above 1% (the BoC likes it near 2%) and annual economic growth is limping along at a skimpy 1.6%. That made it an easy call for the Bank to hold Canada’s key lending rate at 1% today.

“…The fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance,” the BoC said in its statement today. But it nonetheless remains leery about stimulating the economy further and fuelling:

a) more debt accumulation, and

b) a hotter housing market (which it says now has “renewed momentum”).

The BoC has resigned itself to playing a game of patient optimism. Its self-limited policy options have it waiting and hoping for the economy to kick into high gear (or any forward gear besides first gear).

In the meantime, don’t be surprised if we continue to get teased by 2-3 months of positive growth here and there, and then disappointed by what comes next.

The markets (including overnight index swaps — which trade on BoC rate moves) boiled all of this news down to one thing: no prime rate change through 2014.

In addition, bond yields—which lead fixed mortgage rates—sank to a 3-month low. That could pull down long-term fixed rates at least 10-15 basis points.

As for variable rates, they remain near prime – 0.50%, with a slight trend towards bigger discounts. Given that, and the fact that the BoC now admits the odds of a rate cut are the same as the odds of a rate hike, we’ll likely see VRMs become a bit more popular.

Sidebar:  The final BoC rate meeting of 2013 is December 4.

Rob McLister, CMT

  1. I remember a few weeks ago when the new craze was fixed rates going up, how one should lock-in now, before rates go higher… Although fixed rates are correlating with bonds, now that the outlook looks negative, the bonds should get a bid (interest rate drops).
    There was a an article the other day on this website how current rates are abnormal… Unfortunately for many people (retirees mainly) these rates have been at this level for too long and everyone, from big businesses to families to the government are now addicted to low rates.

  2. There is more here than meets the eye. What must be said here is that this latest BofC statement makes the Superintendent of OSFI Julie Dickson’s public declaration about ‘normal’ interest rates not only irresponsible but reckless as well. As a public servant, her responsibility is to supervise Canada’s financial institutions according to the specified duties of her office. She is neither a financial planner/advisor nor a mortgage consultant and therefore should refrain from doling out such advice. Her Masters in Economics merely qualifies her to be in the same group as the rest of the world’s central bankers who seem to continually err with their projections and predictions regarding the global economic recovery, or lack thereof.

  3. us variable rate boys are happier than heck…all these false positives with the when does the economy start turning around and stay turned around?

  4. Best of Times / Worst of Times
    Happily 3.00% Prime for 2 more years, Hello Variable Rate. Some fat guy predicted a big pivot to variable mortgage products when the bonds took off in July / August. VRMs tend to be good things for mortgage brokers we can usually source a good rate and compete with some big banks some of which are shy about offering big discounts from Prime. Some are not (RBC) and some are (you know who you are).
    Sadly with rates certain to stay down; Ms. Dickson and her boss at the MOF have only one option: more rule changes. They are committed to tamping down house prices and now they will have to make that happen themselves. Take your pick: 7.00% minimum down payment unless you are a first time buyer, all rates to qualify at face or bank rate, all mortgages at 25 year amortization, further adjustments to capital requirements and tweaks in securitization rules; it’s potentially a long list.
    An ancient Chinese curse: may you live in interesting times. For mortgage brokers, those times may be here for quite a while.

  5. The concept of “normal “interest rates is one that is difficult to define, as illustrated here:
    For well over 20 years starting in 1935, the prime rate fluctuated very little, while there is tremendous volatility throughout the 70’s, 80’s and 90’s.
    The prime rate has been pegged at 3% or lower for almost 5 years now, with the prospect of that trend continuing for another 2 years. Is it possible that the prime rate could stay this low for 20 or more years? It’s happened before.

  6. Diminishing returns on future mortgage guideline changes should be considered as well, though, no? Each round of rule tightening has a lower effect than the last round, until the consumers stop paying attention, giving in to the fact that the rules will be perpetually changing. Makes the advice of a good mortgage broker that much more important.

  7. What will the pencil pushers at the Dept of Finance do if rates go up 2 percent? Imagine everyone being qualified at a 7.34% posted rate with a 25 year amortization and tighter GDS/TDS ratios. These rules may be sensible today but they’ll be the nail in the housing coffin if rates shoot up.

  8. The rates will not shoot up. Why? I can think of a few reasons: CAD/USD will shoot up, people’s disposable income will get reduced, the banks would lose about 50% on their current bonds, big business will have tougher time obtaining credit, the governments will have to pay more interest. Will start chain reaction.
    Until the Fed doesn’t (want to) move the US interest rates, the Canadian ones won’t go either. And US is in a bigger financial mess than us.

  9. You make enough changes and the consumer simply does not qualify for the mortgage. It has nothing to do with paying attention, if you don’t get the loan the, you don’t get the loan. You stay in the same house. Sooner or later if OSFI or DOF does enough tightening they choke the market off.

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