RBC led the banks this morning by trimming its posted 5-year fixed rate. It dropped 10 basis points to 4.84%, the first 5-year posted rate cut from any major bank since spring 2014. If other banks follow as expected, the benchmark qualifying rate will drop, making it slightly easier to get approved for variable and 1- to 4-year fixed mortgages.
Those looking to Canada’s top bank for leadership on prime rate will have to keep waiting. RBC cut its 3-, 7- and 10-year fixed rates as well, but left its prime rate at 3.00%.
Lenders I’ve spoken with believe the odds are better than 50% that banks will still match the Bank of Canada’s rate cut and lower prime. If prime does drop, the consensus is that it may take until next week, or longer.
Banks were blindsided by the Bank of Canada’s cut, with none of them factoring it into their business plans. That’s a key factor delaying their official verdict on prime. “The fact that there was zero signalling ahead of [the BoC’s move], and there was zero people expecting it because there was zero signalling, was quite odd for any central bank really,” RBC currency strategist Greg Moore told Reuters.
Canaccord’s Gabriel Dechaine believes there will be “regulatory pressure” on the banks to drop prime. (source: Bloomberg)
RBC Economics suggests that the Bank of Canada won’t need to cut rates further. Wells Fargo agrees, saying it’s likely a “one and done” event. Yet, there has never been a case in modern monetary policy history where banks have cut rates only once. Here’s one point from RBC that might be more plausible: “It will take several quarters of above-potential growth before the Bank will begin to raise the policy rate.”
For what it’s worth, Capital Economics’ David Madani chips in with this prognostication: “We think that after standing pat in March, there is a strong chance of another similar rate cut in April.” (source: Barron’s)
How low could our overnight rate go? Right back down to 0.25% potentially, especially if oil prices keep descending. Policy rates for most of the world’s top economies are already at or near zero (Switzerland’s is actually negative).
We’re seeing negative interest rates all around the world. However, former BoC governor Marc Carney has said that 0.25% is the lowest overnight rate target we can expect in Canada.
The 5-year bond yield, which heavily influences 5-year fixed mortgage rates, ended the week at a historical low: 0.7867% (source: MarketWatch). Think it can’t go lower? In fact, 78 basis points is relatively attractive compared to most other AAA nations, which are near or below 0%. At this pace, we’ll likely see 5-year fixed rates break the 2.50% barrier before too long.
RBC’s 10-year fixed mortgage rate is now the lowest in English-speaking Canada at 3.84%. That follows a 47-basis-point plunge in 10-year yields over the last month. Despite this leading rate, few will be lining up for decade mortgages given the prospects of more rate cuts.