BoC Decision: Pleasantville for Variable Mortgagors


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.


(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.


  • “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

  1. This pretty much guarantees more changes to the mortgage industry in 2014. If the market won’t be tempered by rising rates Flaherty will intervene again.

  2. Sarah, How exactly do you define a bubble? And by ‘everywhere’ do you mean in every market with a population over 50,000? Do you mean in every sector of the housing market; detached, condo, new, resale? Statements like yours tell me you are doing nothing but regurgitate the inaccurate generalizations so many pundits, lazy journalists and so-called think-tanks for halfway around the world make about the Canadian housing market, which is as diverse as its population and geography. Michael Ferreira

  3. It seems to me that as the CAD falters, it tends to leave more room for the possibility of rate hikes, without fear of spiking the dollar and hurting exports.
    Some might even argue that with its rather precipitous decent of late, the CAD could use a spike.

  4. The globe and mail ran an article about 2 weeks ago talking about the dollar value, where it is, where it is going and what is good and bad. IIRC, they summarized that the CDN dollar will settle around 80 cents US, which will be reasonably good for our exporting/manufacturing sectors.
    Interestingly they connected Poloz to possibly desiring a lower dollar to help a sputtering CDN economy, despite no official statement of the sort from Poloz or his office.
    I like a low rate as much as anyone, but usually rates increase in “better” economic times from what I can tell. Here’s hoping for better times ahead which include rate increases.

  5. “pundits, lazy journalists and so-called think-tanks for halfway around the world”
    you forgot self-interested prognostications from those with strong ties to real estate and development companies.

  6. I have been riding my 2.35% rate for almost 3 years now. I am happy to ride it even longer. The large consumer debt is going to hold increases to minimal increases when they eventually do go up. So called experts can speculate all they want. Decisions can change on a dime so it is anyone’s guess really.

  7. Happy new year Rob!
    Can I still say that?
    Since you guys started ( I think back in 2007) interest rates really have not gone anywhere.
    This should tell you that the economy really is much weaker than in the past economic cycles.
    The biggest bubble really is real estate which has not gone down in any meaningful way.

  8. Hi Michael,
    This is what defines a bubble:
    “The survey gave the city (Vancaouver) a median multiple of 10.3, meaning its median housing price is about 10.3 times more than its median household income (in Vancouver) – which is $65,000. Demographia considers any score above 5.1 a “severely unaffordable” market” –
    CTV BC 21-JAN-2014

  9. as poloz said — we’re climbing out the economic ‘crater’ but very slowly…so variable rates still a good bet for this year and prob into next year as well…

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