Recent interest rate hike analyzed

Last Tuesday, July 20th, the inevitable rate increase from the Bank of Canada was issued. TD bank was the first of the big banks to increase their overnight lending rate that day to 2.75% from 2.50%.

The Bank had this to say in its written statement: “The global economic recovery is proceeding but is not yet self-sustaining. Housing activity is declining markedly from high levels, consistent with the Bank’s view…

“The Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April.”

“Both total CPI and core inflation are expected to remain near two per cent throughout [2011].”

Going forward the central bank has issued a statement that is similar to the one they released June 1st, meaning they are using sly actions with friendly language. This gives Mark Carney, the Bank of Canada, enough flexibility to keep markets guessing, plus allow him to shift gears on a moment’s notice should the global economy slow further.

“This hawkish action/dovish language tag-teaming will keep markets on their heels, with the effect that although the market will usually gravitate towards the belief that the next decision will be a hike, it will remain slightly queasy about this assumption, and distinctly uncomfortable about later prospects,” said Eric Lascelles, chief Canadian strategist at TD Securities.

Furthermore, the statement that the BoC is providing will be a sneak peak of the BoC’s latest economic outlook. It is possible that the bank will scale back its forecasts for the Canadian economy, given the weak set of data coming from the U.S. and elsewhere. Previously, the bank expected 3.7% expansion this year and 3.1% in 2011, and we may see a little bit of a pullback on their expectations.

Here’s the kicker though, as of this writing, the bond rate (the rate that affects the fixed rates) is near its lowest point in the past 18 months to 2.36% (2.29% is lowest) and lenders actually finally answered the call with lowering their 5-year fixed rates.

The bond rate has actually been sitting quite low for the past couple of months, but lenders have adapted to a new standard and are keeping their profits higher on the 5-year fixed than they usually have. If history is an indicator we should be seeing 5-year fixed rates around 3.69% – 3.89% like we did in February-March, however they are hovering between 3.99-4.19%.

I’m sure the pressure on them to lower the rates is coming more from their mortgage originators’ side as they’ve also felt a slowdown in mortgage applications, hence them dropping their rates to a more comfortable spread.

It’s pretty obvious that the government wants the prime rate to go up, to heed inflationary pressures, along with showing the world that our economy is growing, just not at the pace we were expecting, thus no 0.50% increase just a 0.25%.

This does just go to show you that even with the government increasing their interest rate, doesn’t mean that the fixed rates follow suit! And since about 75% of Canadians choose a fixed rate, this is a great thing. Call your builder or call your realtor but call me first to get your mortgage pre-approved!

Jean-Guy Turcotte is an Accredited Mortgage Professional with his partners at Regional Mortgage Corporation and be reached at 403-343-1125 texted to 403-391-2552 or written to jturcotte@regionalmortgage.ca.

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