With coronavirus panic now setting in throughout financial markets, rate watchers have their eyes glued to the Bank of Canada. Its rate decision comes March 4 and it has the potential to surprise people.
Before the market carnage of the last few days, only a handful of analysts expected the Bank to cut rates next week. And most economists still believe a 25-bps cut won’t come before the central bank’s April 15 meeting.
The Bank is clearly fearful of inflating a housing and debt bubble with further rate cuts. Nonetheless, most experts agree that domestic weakness—exacerbated by the quickly-spreading coronavirus—are likely to force its hand.
With equity markets experiencing a selloff not seen since the financial crisis of 2008, overnight index swap markets are now pricing in three Bank of Canada rate cuts by December.
As for economists, here’s a selection of their rate calls…
March 4 Rate Call: No cut
“…until it is clear that growth has fully shaken off Q4’s paltry performance (and we think it will, with growth at 2.0% through H1), the Bank’s going to keep its finger close to the easing trigger (with housing acting as a safety lock).” - Source
March 4 Rate Call: Cut
“We are revising our call for next week’s Bank of Canada meeting and now look for policy-makers to announce a 25 bps cut to the policy rate. The plunge in global equity markets and sharp drop in commodity prices, in particular oil, are bumping up the risks that the confidence hit in financial markets will be mirrored in household and business sentiment. The data doesn’t show this yet but with markets extrapolating what looked like a modest hit to global growth from the coronavirus into a full-fledged economic downturn, the bank is likely to want to lean against any deterioration in confidence. There is even the possibility of a coordinated central bank easing in the days ahead…The cut in March doesn’t take another move in April off the table.”
March 4 Rate Call: No cut
“Overnight index swaps now imply a 65% chance that the Bank of Canada will respond to fears about the spread of the coronavirus by cutting interest rates next week. But cases of the virus in Canada are still limited to just 14, and the Bank is concerned about the consequences of looser policy for the housing market. We think the Bank would only cut if it were convinced that the disruption caused by the virus elsewhere in the world has already been enough to seriously jeopardise domestic growth…The sharp downward moves in commodity prices are a bigger immediate risk, but volatile market moves may not be enough to persuade the Bank to cut either…All that said, it clearly would not take much more to change the Bank’s mind. While it has been worried about the effects of looser policy on house prices, it may become more welcoming of a further boost to housing wealth if equity values continue to plummet.” - Source
March 4 Rate Call: Cut
“The Bank of Canada doesn’t want to further stoke this fire (household debt-to-income ratios reaching new highs) via rate cuts that could encourage home-buying behaviour. But the unfortunate truth is that it probably can’t do much to manage this market. The recent re-emergence of Canadian housing demand has happened while the Bank held firm with its policy rate. In fact, the Bank of Canada is maintaining a policy rate higher than that of the Federal Reserve even though Canadian economic growth continues to disappoint and is well below that of its southern neighbour…”
“It’s important that the Bank of Canada continue to raise awareness on financial risks to regulators, the government and the public, but the housing market structure has evolved, as have the economic risks within the broader economy. The interest rate lever should be pulled to protect broader economic growth and domestic sentiment at earliest signs of a wobbling.”
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: Three (3)
- Current Prime Rate: 3.95% (4)
- Forecasted Prime Rate (Consensus estimate at year-end 2020): 3.70% (5)
- Lowest Nationally Available 5-year Fixed Rate (insured): 2.49% (6)
- Lowest Nationally Available 5-year Fixed Rate (uninsured): 2.69% (6)
- 5-year Fixed Rate Forecast (For 2025): 2.65% (7)
 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.
 The neutral rate is the theoretical Bank of Canada overnight rate that neither boosts nor restrains economic growth. It’s updated every April.
 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.
 Prime rate is tracked by the Bank of Canada. It equals the typical (mode average) prime rate of the six largest Canadian banks.
 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).
 As of the date of this publication, as tracked by RateSpy.com
 This figure is based on implied Government of Canada 5-year bond yield, five years from now. It’s based on 5-year bond forwards (as tracked by Bloomberg) plus a 150-basis-point spread. That’s the typical spread between the 5-year yield and average 5-year fixed rates. This estimate is highly volatile.