Speculation rampant on when Bank of Canada will announce interest rate increase

Pick up a newspaper or go to an on-line news service and many of the reports invariably speculate on when interest rates will be heading upward, especially when discussing the housing market. 

An interest rate increase is a hot topic with a great deal of conjecture about the timing for an increase in the Bank of Canada rate and the extent it will rise. Even without raising the bank rate, mortgage rates have risen three times in the last month due to other factors, such as the bond market. For example, a number of banks recently increased their rates by 15 to 25 basis points for fixed-rate mortgages. TD Canada Trust and RBC have a benchmark five-year closed mortgage rate now of 6.25 per cent, a full 100 basis points higher than a month ago when it was 5.25 per cent. 

There is no question home buyers have been forewarned. Commentators have said the cheapest interest rates in years will come to an end this year. 

Bank of Canada maintains 

interest rates

As was widely expected, the Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent at its setting on April 20. The trend-setting bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent.

With the bank having dropped its commitment to stay on hold until at least the second half of the year — conditional on the outlook for inflation — financial markets now expect the bank to raise rates at its next fixed announcement date on June 1.

 The bank raised its forecast for economic growth this year from 2.9 per cent in its January Monetary Policy Report to 3.7 per cent, attributing the more “front-loaded” profile for growth to “stronger near-term global growth” and “very strong housing activity.”

However, the bank also cut its forecast for Canadian economic growth, based in part on an expected decline in housing investment “over the remainder of 2010 and well into 2011.”

 The bank said that the economy still faces headwinds from the strength of the Canadian dollar, weak U.S. demand, and “Canada’s relatively poor relative productivity performance.” 

The bank moved the goalposts forward as to when it expects the economy to return to full potential, now forecasting the return in the second quarter of 2011. The bank had previously forecast a return to potential by the third quarter of 2011. This is another signal that rates will have to climb sooner in order to fight inflation.

The bank said core inflation had been somewhat firmer than projected in January, but noted that this was due to temporary factors. The core rate is expected to ease slightly in the second quarter of 2010 and to remain near two per cent throughout the rest of the projection period. Total CPI inflation is expected to be slightly higher than two per cent over the coming year, before returning to the target in the second half of 2011.

In previous announcements, the bank had said it believed the balance of risks to the outlook to be tilted to the downside. At its last announcement, the bank judged those risks to be balanced. 

In its Monetary Policy Report released on April 22, the bank judged risks to the inflation outlook as remaining elevated, but “roughly balanced over the projection horizon.” 

 “The financial markets are almost guaranteeing the bank will raise rates in June,” said Canadian Real Estate Association chief economist Gregory Klump.

As of April 19, the advertised five-year conventional mortgage rate stood at 5.85 per cent. This is up 0.4 per cent from one year earlier, and stands 0.46 per cent above where it stood when the bank made its previous interest rate announcement on March 2, 2010.

Improving credit market conditions have enabled lenders to reintroduce discounts off posted mortgage interest rates. Discounts of about one percentage point can be negotiated, depending on lender-client relationship.

Whether the Bank of Canada raises its overnight lending rate in June or July, the fact remains mortgage rates are already higher than earlier in the year. Looking ahead, Canadians will have to adjust to higher interest rates.

Judging from the results of CMHC’s on-line mortgage consumer survey of 2,500 Canadian home buyers — first-time or move-up buyers active in the mortgage market— Canadians are prepared and aware of the adjustment in interest rates. Eighty-one per cent said they are comfortable with their level of debt, while another 13 per cent were neutral. 

Eighty-five per cent of first-time buyers said they are well versed on how much mortgage they can afford. 

It was pointed out in the survey that two-thirds of first-time buyers used an on-line calculator to compare different options when shopping for a home. 

“Canadians confirmed that they take the time to do research prior to buying a home,” said Pierre Serré, Canada Mortgage and Housing Corporation’s vice-president of insurance product and business development. “Informed home buyers contribute to the continued strength of Canada’s housing system.”

From a Winnipeg standpoint, there is a distinct advantage in having some of the most affordable housing in the country. Despite price increases in the last few years, and higher mortgage rates on the immediate horizon (still very low from an historical perspective), and legitimate reasons to be concerned with the huge growth in land transfer taxes that the province is reaping on home purchases, price points are significantly lower here than in many Canadian centres. 

Local buyers are able to lower their sights to different neighbourhoods or a more modest-sized home in order to become homeowners. In other cities, home buyers can be literally priced out of the market.

“I read with interest this past week how B.C. REALTORS® are meeting with their MLAs in Victoria and highlighting the fact that they have the highest homeownership costs in the country,” said WinnipegREALTORS® market analyst Peter Squire. “Mortgage rate increases will clearly have a greater impact in B.C. than in Manitoba.”

Since WinnipegREALTORS® launched its land transfer tax campaign in order to create public awareness of the huge growth in tax revenues obtained by the province from home buyers, the British Columbia Real Estate Association has called for a three-year phase out of their land transfer tax and increase the one per cent threshold from $200,000 to $500,000 starting on July 1, 2010. This is one way to offset the high cost of homeownership. 

For information on WinnipegREALTORS® campaign, go to www.2muchltt.com.

Be prepared to be see more reports on interest rates in the next few months, as it appears interest on what will happen is not about to wane anytime soon.