Monday Morning Interest Rate Update (October 22, 2012)

David Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News

Mortgage Update Pic

When Bank of Canada (BoC) Governor Mark Carney speaks, the experts I read
carefully parse his words, searching for subtle differences in his phrasing that
may indicate a change in the BoC’s interest-rate outlook. This is a man whose
words can literally move markets and last week when Governor Carney gave a
speech in Vancouver titled “Uncertainty
and the Global Recovery
”, they appeared to do just that.

Governor Carney has consistently warned Canadians that interest rates will
rise faster than most of us are expecting and the BoC’s communications have
contained language to that effect for some time. In July’s
Monetary Policy Report
, to cite a recent example, the BoC closed with the
familiar phrase “some modest withdrawal of the present considerable monetary
policy stimulus may become appropriate”.  

But last Monday in Vancouver, instead of closing with these same words of
caution, as has become his custom over the last several months, Governor Carney
wrapped up his speech by saying “the Bank will take whatever action is
appropriate to achieve the 2% CPI target over the medium term”. This is the same
phrasing that the BoC used in the January
MPR report
when it was much less hawkish on the short-term future direction
of interest rates.

That alone was noteworthy, but then, in his press conference after his
speech, Governor Carney said that “monetary policy is very accommodative right
now and is likely to remain so for some time”. That really got the market’s
attention.

Speculation that the BoC would move off of its hawkish interest-rate position
in its latest MPR (due out next week) was further bolstered by Statistics
Canada’s release of its latest Consumer Price Index (CPI) for September on
Friday. It showed overall inflation holding steady at 1.2%, well below the BoC’s
2.0% target.

So when the BoC issues its latest Monetary Policy Report (MPR) next week,
will the final paragraph reiterate its tightening bias, as in the recent past,
or will the Bank shift to a more neutral stance?

The data would certainly support a change in the BoC’s view. In the April
MPR
, the BoC forecasted a GDP growth rate of 2.5% and inflation in the 2.0%
range but since then, growth has been under 2.0% and inflation has remained well
below target.

Of course, many market watchers have long believed that Governor Carney’s
hawkish interest-rate warnings were only a bluff designed to persuade Canadians
to borrow less - a way to use his words, instead of his less ideally suited
monetary-policy tools, to slow the rate of growth in household debt. If the BoC
takes a more neutral position on interest rates, this may also be because it is
now less concerned about the rate at which household debt levels are rising.

While BoC policy meetings and announcements haven’t held much mystery lately,
I will be very interested to read the finely tuned language in the last
paragraph on the next MPR report when it is released this Wednesday. Stay
tuned.

Five-year GovernMortgage Rate Chart (Oct 22, 2012)ment of Canada (GoC) bond yields were flat last week, despite
lots of volatility. My best one-year fixed rate was pushed up a little (to
2.69%) while five-year
fixed rates held firm in the 3.00% range.

Variable-rate discounts are still available at prime minus 0.40% (which works
out to 2.60% using today’s prime rate). If the BoC does change its view on the
future direction of interest rates, it may be time to ask if paying any premium
for the stability of fixed rates is still worth it. If there is very little
chance that rates will rise for the foreseeable future, paying any premium, even
a small one, for the certainty of a fixed rate may no longer make sense. I’ll
cover this topic in more detail in my next Quarterly Mortgage Market Update.

The bottom line: I continue to believe that interest rates will
remain at ultra-low levels until the world looks a lot different than it does
today. As such, I expect the BoC to shift its guidance to a more neutral
position in next week’s MPR. If it doesn’t, I think it will be because the Bank
is still worried about rising household debt levels and not because it thinks
rates are likely headed higher any time soon.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave

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