After the big fixed mortgage rate increase at the end of last month, many people are now looking for indications of when variable mortgage rates could follow. As variable mortgage rates are influenced by different factors than fixed rates, the largest being the Bank of Canada’s key lending rate, the focus has turned to Bank of Canada’s Governor Mark Carney, and when he could start hiking rates from their all time lows.
The Globe and Mail had a story today outlining the 2 seperate camps that have evolved as to when rates could rise. The difference relies on Mr. Carney’s use of the term “conditional” commitment to keep rates at 0.25% until the end of Q2 2010 depending on the inflation levels. The camps are:
The Two Camps
1. “Conditional” means conditional – The Central Bank’s first interest rate announcement after the commitment deadline is July 20. His unique guidance last year providing a term that they would look to keep rates at their current levels was meant to provide stability during the global economic crisis. If inflation goes beyond the 2% target level, as inflation control is the Bank’s main mandate, they would need to act and increase rates. His commitment was never meant to totally tie his hands completely, hence his use of term “conditional”.
2. Bank’s commitment must be honoured – The second camp believes that for the Central Bank to keep credibility they need to stick to the June 2010 deadline. Even though current rate of inflation is slightly above the 2% target, in order for them to be able to influence markets again in the future with this type of guidance, they need to honour the commitment, rather than break what they believe to be as an explicit promise.
The Bank could get around these issues by keeping their promise to keep rates steady until July 2010, and then just increase rates more aggressively. So rather than have a 0.25% lift in June and a similar one in the following month, they could only increase the target for the overnight rate by 0.50% in July. Which is better? That’s very tough to say, but one could argue that a slow and steady increase is better than surprise, larger shocks.
The Bank of Canada is releasing a few key reports in the next 2 weeks which greatly help provide transparency into what they could be forced to do.
Retail banks rate increase forecasts
The big banks are also starting to publish when and how much interest rates are likely to increase as follows:
- BMO: July 20
- CIBC: July 20
- Scotia: June 1
- TD: July 20
- RBC: July 20
Here is how they are forecasted to increase by the end of 2011:
- BMO: +3.00%
- CIBC: +2.25%
- Scotia: +2.75%
- TD: +3.00%
- RBC: +3.25%
To stay on top of when rates change, we offer a few tools: