The Rate Increase Cycle Begins

Bank-of-Canada-RatesFor 13 months, Canadians have enjoyed the lowest interest rates of all time. But the party had to end eventually.

Today was that day, as theBank of Canada (BoC) raised its key lending rate by 0.25 percentage points.

If lenders raise prime rate by 1/4 point, as expected, homeowners with variable mortgage payments will see roughly $12 of monthly payment increase per $100,000 of mortgage.

Other highlights from today’s BoC statement:

  • “Activity in Canada is unfolding largely as expected.”
  • “The spillover into Canada from events in Europe has been limited to a modest fall in commodity prices and some tightening of financial conditions.”
  • “Household spending is expected to decelerate to a pace more consistent with income growth.”
  • “Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

That last point, and the bond market’s muted reaction to this news, suggest that another rate hike on July 20 is far from certain. (Bond yields are down considerably today, largely because Euro-concerns have traders flocking to safe investments.)

The pace of rate increases going forward will depend heavily on global growth and the resolution of Europe’s debt problems.

As of yesterday, Big 5 bank economists were suggesting (on average) that prime rate will rise from today’s 2.25% to roughly 3.25% by year end.* By the end of 2011, their forecasts imply a 5% prime rate. But those estimates will change as weeks progress, as they always do.

On a positive note, the BoC also reassured Canadians in its statement. It said, “This decision still leaves considerable monetary stimulus in place.” Variable mortgage rates, for example, are still under 2%.  That’s just a tick above their all-time bottom.

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* Source: Mean average of the overnight rate change forecasts published by BMO, CIBC, RBC, Scotia, and TD—as of May 31, 2010.

Source: Canadian Mortgage Trends

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