12 april 2010

Here are the main forecasts, predicting rate hikes in the end of 2011:
•    BMO:  +3.00%
•    CIBC:  +2.25%*
•    Scotia:  +2.75%    
•    TD:  +3.00%
•    RBC:  +3.25%
The average estimated increase of the overnight rate is 2.75%.
* In Global Positioning Strategy report, Mr. Shenfeld from CIBC World Markets listed several reasons for Bank of Canada Governor Mark Carney to keep interest rates subdued after July. He believes that the U.S. will probably use a more gradual approach to raising rates. It means that if Canada starts doing it too fast, it could send the Canadian dollar soar.
“While in Canada factories are recovering, output remains nearly 20% below the pre-recession peak. The wages are now substantially above those stateside, but the productivity gains still don’t match,” Mr. Shenfeld said.
He also thinks that inflation is not expected to rise much further. The stimulus spending is expected to be reigned in by governments. It will definitely slow growth.
“If the U.S., the U.K., and Japan move from large stimulus to even modest restraint, Canada will feel it in our export prospects even in 2011,” Mr. Shenfeld noted.
It will certainly make doubters stop, because some still fear slow growth or a double recession.
Speaking about the first rate change, the banks expect the rates to start their climb by July:
•    BMO:  July 20
•    CIBC:  July 20
•    Scotia:  June 1
•    TD:  July 20
•    RBC: July 20 (“Though, markets are becoming more
anxious about a June increase,” RBC says.)
We’ll get more information after the BoC’s next interest rate announcement in eight days.
The next question is: how fast will rates run up? BMO said: “The Bank (of Canada) probably has a predilection to raise policy rates expeditiously.”
The average economist polled by Bloomberg expects 1% increase till the end of this year.  It means a 175 bps hike in 2011.
If prime rate increases to 2.75%, that could suggest a 35% payment increase for certain floating-rate mortgage holders. (e.g., payments could jump $284 on a regular $200,000, 1.75% variable mortgage amortized over 25-years). This assumes the banks don’t “give back” the 0,25% they withheld when prime rate dropped 0,75% in December 2008.
Speaking about fixed mortgage rates, the bond market will act as usual. CIBC economist, Avery Shenfeld, expects bond yields to run up more than some people expect—at least initially:
“When the rates rise, the bond market is likely to become even more aggressive. The first hike could also provoke more Canadians to fix their variable rate mortgages, putting even more pressure on five-year yields”.
The big banks forecast the 5-year bond yield to 3.75%-4.10% in a year. Based on historical spreads, that would put typical discounted 5-year fixed mortgage rates at roughly 5.13% in 12 months—an 88 basis point increase from today.
Note: Of course, you should take any rate prediction with a bit of skepticism. Rate forecasts are very weak and the economy can change in a moment.
PLEASE SEE OUR CALCULATION FIXED VS. VARIABLE, based on the latest assumptions

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