Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News
Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.
Last week the Bank of Canada (BoC) announced that it would once again hold its overnight rate at 1%, as was universally expected. But in a somewhat surprising move, the Bank significantly altered the language in its accompanying commentary.
Here are the key phrases from the BoC’s latest statement with my comments in italics:
The BoC’s latest forecast represents a subtle but important shift in its view of what our economic future may hold. The Bank acknowledged that downside-inflation risks are a growing concern without altering its cautiously optimistic overall long-term view.
Its careful choice of words nudges the Bank from a neutral interest-rate stance to a slightly more dovish bias. Like the fine-tune dial on an old radio transmitter, emphasizing the risks of downside inflation is actually a subtle way for the BoC to stimulate our economy.
The Bank knows that global investors will reduce their Canadian dollar holdings if they see increased odds that our short-term rates will fall, in the same way that the BoC’s previous tightening bias helped push the Loonie higher.
True to form, the Loonie fell sharply after the BoC’s latest statement was released.
The BoC has to walk a fine line. On the one hand it wants to offer a more cautious view, which softens the Loonie, but on the other hand, it doesn’t want to scare off business investment, which it believes is the key to assuring sustainable economic momentum.
Forecasting is hard enough without having to overlay a whole series of competing objectives. That helps explain why the Bank gives itself ten chances a year to tweak its views and why it relies heavily on “zones” and “ranges” when weaving its carefully crafted web of words.
Five-year fixed rates were 9 basis points higher last week, closing at 1.83% on Friday. Lender rates were largely unchanged last week and market five-year fixed rates are available in the 3.35% range from lenders that offer reasonable terms and conditions.
Variable-mortgage rates are offered in the prime minus 0.55% range, which works out to 2.45% using today’s prime rate of 3.00%. To see how fixed- and variable-rate interest costs might compare over the next five years, check out my latest variable-rate simulation.
The Bottom Line: The potential savings inherent in today’s variable-rate mortgages continue to grow as the BoC tries to replace expectations of its next move being an overnight-rate increase with speculation that it may actually drop its rate instead. While I think the possibility of a rate drop is still remote under our current circumstances, variable-rate borrowers should take the Bank’s latest shift in emphasis as a reassuring signal that any potential rate increases should remain a long way off.
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