Rate catalysts can come out of nowhere. A striking example is the coronavirus. Suddenly, the micro-plague out of Wuhan, China is a momentous factor moving rates.
How much it sways rates is the big question. And it’s clear from the economists below, consensus opinion on that is weak at best.
As we speak, the market’s rate outlook for 2020 remains flat to slightly lower. Here’s what Bay Street says about where rates are headed…
BMO Economics
March 4 Rate Call: No cut
Following the coronavirus outbreak, BMO lowered its forecast for Canadian growth. It dropped the bank’s Q1 growth forecast from 2.5% to 2.0%, while lowering its 2020 growth forecast to 1.7% from 1.8%.
“The slightly dimmer growth prospects for Canada raise the odds of a Bank of Canada response, especially given their overt dovish stance in last [month’s] MPR. We are not quite prepared to fully throw in the towel and call for a rate cut, given that the Bank will have plenty of time to assess the economic impact of the virus in the months ahead. But the market is not waiting around for the details, and has more than one rate cut fully priced in for the year.” Source
RBC Economics
March 4 Rate Call: 25 bps rate cut
“The BoC doesn’t appear to be in any rush to ease monetary policy (having held rates steady last year while others cut)... But with growth numbers having disappointed recently—and…not entirely due to transitory factors—we continue to think the door is open to a rate cut by the middle of the year.” Source
Capital Economics
March 4 Rate Call: No cut
“With the Bank presenting a dovish policy statement last [month], other commentators are suggesting the Wuhan virus will be the final straw for rate cuts…A closer look at the historical episode [of SARS in 2003], however, shows other factors were more important in causing the Bank to reverse course,” like the Iraq invasion and a Fed rate cut in June 2003.
“Even if there is a hit to growth [from the virus], it should prove short-lived and there would be scope for a rebound afterwards. That means it wouldn’t necessarily change where the Bank of Canada sees either the output gap or inflation in 12 to 18 months’ time. It is those forecasts, rather than the outlook for the next two quarters, which will continue to guide the Bank’s policy setting. It is also worth noting that, given the Bank of Canada’s worries about the housing market, it may be more concerned about the implications of recent market moves. There has been a 35-bps drop in five-year bond yields so far this year and we are already seeing lenders cut their mortgage rates in response.” Source
TD Economics
March 4 Rate Call: 25 bps rate cut
“High household leverage within pockets of the country (mainly two provinces, Ontario and British Columbia) have raised concerns over financial stability among policy-makers…The Bank of Canada doesn’t want to further stoke this fire via rate cuts that could encourage homebuying behaviour. But the unfortunate truth is that it probably can’t do much to manage this market… The interest rate lever should be pulled to protect broader economic growth and domestic sentiment at the earliest signs of a wobbling.” Source
Latest Rates & Forecasts
- Bank of Canada Overnight Rate: 1.75% 1
- Bank of Canada Estimated Neutral Rate: 2.25% to 3.25% 2
- BoC Rate Cuts Priced in this Year: One 3
- Prime Rate: 3.95% 4
- Prime Rate Forecast (Consensus forecast at year-end 2021): 3.95% 5
- Average Canadian 5-year Fixed Rate: 2.89% 6
- 5-year fixed rate (Consensus forecast at year-end 2020): 3.35% 7
[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 every April.
[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] As of the date of this publication, as tracked by RateSpy.com
[7] 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).
