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CategoryMortgage Trends

Lower inflation figures mean less pressure to raise rates…

Latest figures show inflation is not a problem…. The latest 12 month figures show inflation running at about 1.7% which is within  the Bank of Canada’s 2% target rate….

Inflation is one of the biggest factors that affects the Bank of Canada’s key rate (the rate that affects Bank’s Prime rate)…..this is good news for Canadian borrowers as there has been a large amount of media coverage regarding the much-anticipated interest rates hikes…

Oh, and by the way… the Bank Prime rate still 2.25% (an all time low)…  Why not just enjoy the low rates and not worry about what might happen in a few years?

Bank of Canada doesn’t change rate…for now.

No surprise, the Bank of Canada did not raise their key rate today, keeping it at 0.25%.   This rate directly affects the Bank Prime rate which is 2.25%.   But as so many Economists have forecast, this appears to be the end of the record low Mortgage rates.

But it’s not that bad… we have enjoyed record low rates (almost free money, some would say) for well over a year.. and they are only starting to climb.. we’ll be enjoying low rates Variable rates for some time yet…

In it’s press release, the Bank of Canada stated “the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.”

The big question on everyone’s mind is how fast and by how much will rates increase… Here’s what to look for when it comes to what affects Variable rates:

  • Inflation (the target rate is 2% and we are currently at 1.6%…if this increases then the Bank of Canada will want to increase the Bank rate)
  • unemployment (currently sitting at 8.2% if we have higher than expected unemployment then this also puts pressure to keep the Bank rate low
  • Canadian $ in relation to the $U.S.  (today, the Canadian $ jumped over $1.016 and a high $ is bad for Exports and Manufacturing….the higher the Bank Rate, the higher $ will usually increase)

Fixed rates are more volatile as they are affected by the Bond Market… The Bond Market seems to have priced in a 50bps increase by the Bank of Canada as Bond Yields increased by 0.126% to 3.19% at the time this article was written.   The Banks have increased Mortgage Rates by 0.85% over the past 3 weeks and should hold until the Bond yields increase to above 3.40% or 3.50%….Historically, the Banks want to earn a spread of around 1.20% and 1.30%.

CIBC Economist forecasts for low mortgage rates through 2011

Here’s some good news to end the week…

CIBC’s Avery Shenfeld was quoted as saying interest rates would remain low through 2011… hey, that’s a different message from what we’ve been hearing lately… complete article here..

CIBC has a good history when it comes to forecasting rates…  And I think his forecast makes a lot of sense…

Some of the fundamentals for the forecast:  an expected low inflation level, mixed in with 20% lower overall Canadian output compared with the peak of 2008…end result is less pressure for the Bank of Canada to raise rates as much or as quickly as we once thought…

But there are more factors that I think will cool our Economy somewhat…. HST coming in July… New Mortgage Rules coming into effect in a few weeks….continued slow Global recovery…. continued slow U.S. recovery…

Lower rates for longer period of time?   Hmmmm…wonder how the media can turn that into a negative story….(sorry, couldn’t resist the sarcasm).  Yes, it’s GOOD time to borrow money.. don’t let anyone tell you otherwise… these are historical lows….Enjoy!

(but before you go… It’s important to point out that Experts are expecting the Bank of Canada to raise their rate in June or July…. but that’s NOT a reason to panic or get nervous.. the Bank rate is at 0.25% and our Bank Prime is at 2.25%…  these are both RECORD lows…we’ve never seen rates this low…..we must expect increases to come)

Mixed views on inflation reports

Here’s a great article that explains there is no reason to panic…   This week saw the much expected hike in mortgage rates… Bond market is up around 0.30% but the Banks felt they needed to increase the rates by 0.60%….

Hmmmm…didn’t the Banks just announce some HUGE discounted rates a week or two ago?   Talk about a strategic PR move…. Well, that didn’t last long…they have all bumped up the Posted rates…

With the Canadian $dollar just about equal with the $U.S. dollar, there is a little less pressure for the Bank of Canada to raise the overnight rate as aggressively as once thought….we can still expect increases of 0.25% to 0.75% over the next 6 to 12 months but remember that we are well below the 10 yr average of 5.177 and well below the 25 year average of 6.92%....Historically, if the $CAD rises, then the Bank of Canada is less likely to raise rates…

3 main factors to watch that will affect the Bank of Canada Rate…. Inflation, unemployment and the $CAD.    Oh, and by the way, here are the 8 preset dates when the Bank of Canada sets the overnight rate.

Tuesday, 19 January 2010
Tuesday, 2 March 2010
Tuesday, 20 April 2010
Tuesday, 1 June 2010
Tuesday, 20 July 2010
Wednesday, 8 September 2010
Tuesday, 19 October 2010
Tuesday, 7 December 2010

Historical rate trends favour variable rates..

Sometimes it’s just easier to see the numbers on a graph.. Here are a few updated graphs from Firstline Trust… Firstline Trust Historical Rates February 2010… Notice the spread between the Bank Prime rate and Fixed Rates… the spread is usually around 1.00% to 2.00% in favour of Variable rates.

Variable rate mortgages have outperformed Fixed rates in over 88% of the time…. here’s a great study by Professor Moshe Milevsky of Schulich School of Business… Milvesky variable rate 2008.    And here’s an article today by the Canadian Press that comments quietly, that Variable Rate should still be considered…

Hey, by the way… did I mention that we are still in historical rate territory?  If you look back at historical rates, you will see that it’s still a GREAT time to borrow money… Fixed rates in the 4.00% range… Variable rates still under 2.00%…  Doesn’t sound too bad to me…

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