Canada’s economic engine ultimately determines the mortgage rates we pay. And these days, that engine is running at a lower RPM than in the past.
“Canada’s economy is in a new age,” says Desjardins Economics. In a report released last week it states that economic growth potential “will remain between 1.5% and 2.0% from now until 2030.”
If this call is even remotely true (remote being the most we can expect from an economic forecast), then we’ll have gone from a 3.3% real average growth rate since the 1960s to as low as 1.5% for the next 15+ years. A healthy growth rate is closer to 2.5%.
Is it any wonder then that Desjardins concludes: “…interest rate equilibrium levels will be lower than in the past?” At these stunted growth levels, even risk-haters may start considering variable mortgage rates.
No one truly knows where interest rates are headed. Yet, despite vast margins of error, all major financial institutions regularly publish rate predictions.
If only we could assume that these economists were right – or even half right – it would be far easier to determine the lowest-cost mortgage term.
That’s not possible of course, but what if we pretended for a minute that today’s long-term rate forecasts were indeed accurate? With this hypothetical, we’ll estimate which mortgage term offers the best value and see if any conclusions can be drawn.
We find rate predictions more fun than astrology (and almost as accurate).
For those who give weight to economists’ rate models, the past month has been intriguing. Our dismal scientist friends seem to be getting ever more pessimistic.
Economists’ 2013 prime rate prognostication, for example, is now 1/2 point lower than it was a little over a month ago.
46% probability of a rate cut Sept. 7.
100% probability of a rate cut by year-end.
That’s what prices of closely-followed overnight index swaps (OIS) were implying at the close of business on Monday. OIS trade on market expectations for Bank of Canada rate moves.
That amounts to a 180 degree swing in market psychology. Just a few weeks ago traders were pricing in a rate hike by January.
Over the past few months, major economists have backpeddled on their rate hike predictions.
Not long ago, the consensus of economists was projecting a July 19 increase. Now, those same analysts aren’t looking for a rate bump until this fall…or later.
Here’s a chart from BMO illustrating how fast rate hike expectations have waned.
A slew of factors justify a deferral of rate increases, including:
As was widely predicted, the Bank of Canada left its key lending rate unchanged at 1.00% for the sixth consecutive meeting.
A survey of 22 economists conducted by Bloomberg News prior to the rate decision found them unanimous in predicting this status quo.
The holding pattern on rates has been welcome news for variable-rate mortgage holders, with the prime rate remaining at 3.00% since September.
Benjamin Tal is one of Canada’s most quoted domestic economists. In speaking to an audience at Dominion Lending Centre’s National Conference, Tal outlined why interest rates may take the slow road higher.
Echoing words from the U.S. Federal Reserve, Tal said we’re in an “unusually uncertain market.” Canadian and U.S. central bankers would be the “first to admit” they don’t know what to do.
Since the last rate forecast in January, the long-term projection for prime rate has fallen 1/4 percentage point.
Apart from that, the Big 6 banks’ rate predictions haven’t changed much.
Below you’ll find a summary of the latest year-end interest rate projections from each of Canada’s major banks. Use them only as a rough guide because economist rate outlooks have considerable margins of error.
As a whole, economists are all over the map on when the Bank of Canada will raise rates next. First-hike expectations range from May 31 to October 25.
For what it’s worth, financial markets are now pricing in a September rate hike.
Primary dealers, on average, are looking for a July hike.
For those seeking additional perspective, here’s a sampling of the latest econospeak…
With the Bank of Canada maintaining the status quo yesterday, many are wondering what’s next for mortgage rates.
If you put any stock in the Big Six banks’ predictions, here’s the latest commentary from their professional ball gazers…
CIBC: “We’re sticking with our view that an upgraded economic outlook in April’s policy report will pave the way for a rate hike in May, assuming the C$ settles down a bit before then.”