Pleasantville-in-the-rate-market

Today’s Bank of Canada (BoC) interest rate decision was reassuring for variable-rate borrowers.

  • The Bank announced that Canada’s key lending rate will remain just 75 basis points above its all-time low.
  • The Bank suggested its next move is just as likely to be a rate cut as a rate hike.
  • It said the risk of falling inflation “has grown in importance” and that inflation won’t rise back to its target for “about two years” (suggesting even less chance of a prime rate increase through 2015).

Even if inflation does return to its 2% target, that alone isn’t enough reason for the Bank to raise rates.

So essentially, it’s Pleasantville right now for variable-rate borrowers, with no hikes in sight.

In terms of what it would take for the BoC to actually lower rates, it would likely need at least 2-3 more months of weak economic data (be it falling exports, business investment, inflation or employment).

Fixed income traders believe that could happen. They’re now betting more heavily on a rate cut by October than a rate hike or no change combined. That reflects a key change in market-wide rate expectations over the last month.

Rate-Probability

(Click to enlarge)

Economists, as is often the case, have a different opinion. Those polled by Reuters expect the next rate move to be an increase in mid-2015. (Source: Globe and Mail)

Bond traders took today’s news in stride. The key 5-year yield (which influences fixed mortgage rates) was mostly unchanged, while the loonie dove to a 4-year low.

The next Bank of Canada rate meeting is March 5.


Quotables:

  • “It’s probably as dovish as they could go without adopting an outright easing bias.”—David Tulk, TD Securities (BNN)
  • “The economy is fragile because it relies highly on just one thing…housing.”—BoC head Stephen Poloz (BNN)
  • “…Interest rates…will need to stay low longer than we thought…”— Stephen Poloz

Rob McLister, CMT