Borrowers were reassured this week that rates will remain ultra-low for the next two years.
The Bank of Canada delivered that message on Wednesday as it pledged to “hold the policy interest rate at the effective lower bound until economic slack is absorbed.”
“In our current projection, this does not happen until into 2023,” it estimated.
For more on how mortgage borrowers should view this, here’s the latest from key economists…
On monetary policy: “Indeed, there's a long way to go for the Canadian economy to emerge out of this crisis. The path forward is filled with uncertainty, most of which could set the recovery back a step or two. The Bank [of Canada] will do its part in supporting the economy through this ‘recuperation’ phase. With economic slack only expected to be fully absorbed in 2023, the Bank is set to continue to provide monetary support for many years to come.” (Source)
The Dot’s Take: TD has a loose definition of “many.” Bank on two to three years. If low rates extend to 2024 or 2025, borrowers should consider themselves lucky. Recessions always end, recoveries always pick up steam in a few years and rates always rise when they do. This one will be no different.
On inflation: “In spite of [the BoC now expecting GDP to be 1.4% higher in 2022 than it did previously], the Bank [of Canada] trimmed its inflation forecasts and so, if it follows the Federal Reserve in shifting to an average inflation targeting regime as looks possible, it may end up waiting even longer to raise interest rates” than its current 2023 forecast.
The Dot’s Take: Translated, this means average core inflation in Canada will probably need to exceed 2.20%+ for a BoC rate hike. That could take 18-24 months or it could take 4-5+ years. It’s impossible to say.
On monetary policy: “The BoC doesn’t appear to have contemplated any additional stimulus…and faces less pressure to do so thanks to the substantial fiscal support (particularly for households) that remains in place…We think it would take a much more severe second round of lockdowns and renewed declines in economic activity for the BoC to follow other central banks in adding further stimulus. In such a case, QE would likely be the preferred option…” (Source)
The Dot’s Take: Don’t plan on another BoC rate cut.
On negative interest rates: “In the current situation, it's not something that we think would be very helpful, in fact it could be disruptive. But it is in the tool kit and if the situation were to dramatically change, it is something we could consider. That's what I meant by 'never say never.' The bar would be very high to do that and it is not something we are currently discussing. It is not something we discussed at our most recent policy deliberations." (From the BoC’s Oct. 28 news conference)
The Dot’s Take: If we do get another BoC rate cut, it may very well be only 0.10 or 0.15 percentage points, as the Australians are currently contemplating.
[1] The overnight rate is the interest rate the Bank of Canada uses to control inflation. It raises the overnight rate to slow inflation and vice versa. The overnight rate is the #1 determinant of prime rate, the basis for variable-rate mortgages.
[2] The neutral rate is the theoretical Bank of Canada overnight rate that neither boosts nor restrains economic growth. It’s updated once a year. (Latest estimate)
[3] This is the implied number of Bank of Canada rate changes based on prices of overnight index swaps (OIS). OIS are bond market derivatives that traders use to bet on the direction of interest rates.
[4] Prime rate is tracked by the Bank of Canada. It equals the typical (mode average) prime rate of the six largest Canadian banks.
[5] This figure equals the year-end 2021 overnight rate forecast from major economists (as tracked by Bloomberg) plus a 220-basis-point spread (which is the current spread between prime rate and the overnight rate).
[6] Average of latest published 5-year yield estimates from BMO (0.60%), National Bank (0.45%), RBC (0.65%), Scotiabank (1.10%), TD (0.85%)
[7] As of the date of this publication, as tracked by RateSpy.com
[8] This figure equals the year-end 2021 5-year Government of Canada bond yield forecast from major economists (as tracked by Bloomberg) plus a 150-basis-point spread (which is the typical spread between the 5-year yield and average 5-year fixed rates).