Some rate news of note:
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.
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Last modified: January 25, 2015
Early renewals tactics used by bankers might work differently at this time
Great info. as usual Rob.
I don’t believe any economist or anyone who “thinks” what will happen, as none of them even called the BoC to drop rates as they did!
Hey Kothar, The BOC rate drops weren’t supposed to be predicted. It was a hedge against foreign investors shorting Canadian banks, which is why they did it even in the face of being “on target” for inflation.
Very few people saw the crash of 2008 as well. This should be a reality check for all of us that there are larger forces at play, and we can’t predict everything (or anything with certainty). Admittedly, it is ironic that the first rate shock is a downward one.
Have 8 pending sales since the date of the rate cut, eventhough variable rates haven’t budged.
I’ve advised some clients that chances are that if in the event of a correction in housing prices, the Bank of Canada would reduce rates to possible 0%. As a result, it would prevent any correction and would lower interest carrying charges.
This rate cut is a win win for home buyers and the Canadian economy .
So now you say the rate cut was done to hedge against foreigners shorting our banks. Now why haven’t I seen this theory anywhere in the vast media? Speculators against our currency lately on shorts on it, but our banks? Banks are protected by the CHMC taking on all their risk, the GOV and tax payer are liable, not the banks!
Hey Kothar,
It is being discussed out there in the vast media, and this isn’t the first time this has happened either. This is history repeating itself. You can check out this article among several others if you’d like. BNN is also a great way to keep track of these kinds of conversations.
http://business.financialpost.com/2015/01/14/sell-canada-investors-bet-against-loonie-bank-stocks-as-oil-collapses/
I don’t disagree with you that CMHC takes on the risk for mortgage lending (that’s a separate conversation on the value of that). Unfortunately prime rate doesn’t just affect our beloved mortgage industry – it’s involved in a myriad of other financial instruments, which aren’t covered by CHMC.
I am but a naïve, and simple man. How is it legal for banks not to drop in relation to BoC cuts? Up swings in their favour would be felt immediate. Why do we have to wait? What is the point of a variable if it’s really at their discretion?
Eco that. That is the point of variable. Both parties agree that it is Tighten to the PRIME rate!!! upon signing contract. It should work both ways up/down. I would love to see the banks hesitated to bring the rate up.
[…] Well, it looks like a yes. The Royal Bank of Canada has dropped its rate for a five-year, fixed-rate mortgage to 2.84 per cent, from 2.94 per cent, according to Bloomberg. The bank also cut its three-, seven- and ten-year fixed rates as well, Canadian Mortgage Trends reports. […]
Rob. Are you in with the banks or updating the site with the proper prime rate is taking long time to upload to the server.
My guess as to why First National hasn’t passed through the drop in CMB rates to their mortgage rates: -They have some very big mark to market losses on short 5 year canada bond positions used to hedge their commitment pipeline. I’m guessing around $30 Million- which to the First Nat guys would be meaningful. Those losses would become real losses if First National drop there rates and customers benefit from rate float down. Wouldn’t surprise me if other guys are stuck the same way. If that’s true, rates should come down once the hedges all come off.