Bank of Canada Rate Announcement: No Change

Good morning, the Bank of Canada had their scheduled rate announcement this morning & after dropping rates 3 times for a total of 1.5% in rate cuts in the span of 3 weeks, held rates as is.  Not that there is much room to move here as the key lending rate is a hair above 0%. 

What we saw in the last month was rates hitting all time lows, then bouncing sharply as lenders started seeing rising risk premiums & a higher cost of funds. That’s really an indication of trouble behind the scenes.  The feds acted quickly in setting up a number of measures to help liquidity & get rates back in line with where they should be & we are starting to see that take effect now as rates have started to trickle downwards once again.

Couple items of note, Canada started up our own form of Quantitative Easing in buying $5B worth of government securities per week, as well as allocating $10B to purchase corporate debt.  That last move is significant.  One of the criticisms of how the US handled the great financial crisis was their bailing out of what were essentially bad investments.  The question of moral hazard is one to be asked at all levels.  In a world of bailouts, what happens to risk?  Does it go away, or does it become a slippery slope where bailouts get bigger & bigger as they have in the US? What is the endgame?

Some pretty staggering stats in the last month:

  • 1m workers lost jobs.  The largest decline ever & wiped away 3 years of job creation in a single month
  • 6m Canadians applied for emergency response benefit, which is 20% of our entire workforce.
  • 12% of all mortgage holders in Canada applied for payment deferral

The challenge now facing everyone, is how to open up the economy without putting strain on our healthcare system.  There is no great solution to this, at least not yet, but when that happens the question will be if pent up demand is able to bring our economy roaring back. 

I’m going to link to the most current info on how to apply for mortgage deferral below, but wishing you all good health & luck in getting through this dark time in our history.

Link to info on Covid-19 lender relief

Bank of Canada release

Big Move By the Bank of Canada

What a week we’ve had…  Yesterday the US Fed did something they hadn’t done since oct 2008.  Oct 2008, for some reason that time period stands out but I can’t quite put my finger on why, OH YA, Lehman Brothers went belly up & the global financial system was in shambles!    

​So what did the Fed do?  The Fed had a scheduled meeting for 2 weeks from now but decided to ​do an emergency rate cut of not 0.25% but 0.5%.  

Fast forward to this morning & the Bank of Canada matched them with the same 0.5% drop.  This was the first time Canada has done such a move since spring 2009.  Not very encouraging precedents…

The reason for the big move was due to the corona virus.  Regardless of whether you think this is overblown hype or a legitimate concern, the reality is covid19 brought China’s economy to its knees.  China consumes about half of the world’s resources so that alone poses a problem for a commodity based nation like ours. 

But what can Central Banks really do to interest rates that are going to counter that?  They’re not buying oil.  They’re not buying plane tickets.  Earlier in the week we saw the Bank of Japan step in with 500 BILLION yen in liquidity injections, followed by the Bank of Australia cutting rates, but both their respective markets, just like the US, rose briefly then fell.  What we are seeing is Central Banks losing their ability to actually impact markets & growth. 

So what happens from here?  Is this big move the only we’ll see?  If you’ve been following these summaries of mine then you’ll know that I’ve been expecting lower rates since the summer.  The US has a dollar shortage & strength problem they’re trying to fix.  You’ve got the eurozone on the brink.   I think this is going to be a race to the bottom.  And all that was before coronavirus.  

I’ve been following this virus since mid January & it was pretty clear even back then that this is an incredibly contagious virus.  Anyone who looks at how exponential growth works can see how quickly this can overwhelm a country’s resources, particularly healthcare, & that, to me, is the big risk here at home.  Call me a fear monger or buying into the hype, or whatever… a country like China doesn’t completely shut down if it wasn’t absolutely necessary.

So in summary, big rate drop today.  Bond yields are either at or near all time lows. The loonie is weak.  Business investment is down.  It’s not a pretty sight & it appears this could just be the beginning. 

How’s that for a happy morning update?  I’m Ryan, thanks for watching & have a great day.

Bank of Canada Rate Announcement: UNCHANGED

Goooood morning & welcome back from summer,

A LOT has happened. First thing’s first: the Bank of Canada held rates steady this morning but the expectation is that will only last until Oct or Dec at the latest before hopping on the rate drop train.

Global momentum has slowed & commodity prices have drifted down accordingly. The trade war has escalated over the summer & is now turning into a currency war. It’s something like ¼ of all government bonds, $15 TRILLION dollars worth, are negative yielding. Take a moment to consider what that really means.

Bonds have traditionally been where you place money for safety. A negative yielding bond means you are PAYING for the privilege of lending a government money. Think about that. You are guaranteed to lose money if you carry the bond to maturity. This is bananalands. What happened to save your money & be rewarded by having more tomorrow than you’ll have today? What are the implications when you lose money keeping it in what has traditionally been the safety trade? It’s very difficult to wrap your head around how backwards this has become & what impacts this is going to have to the world. Central banks are losing the fight against deflation.

The Bank of Canada expects economic activity to slow in the second half of the year. From what I’m reading, the US needs to drop 50bps at their next meeting & I’ve read as much as 100 bps by the end of the year. That is going to put pressure on Canada to start heading in the same direction. That all sounds great on the mortgage front but when you consider that central banks traditionally need 5% worth of rate cuts to pull an economy out of a recession & we’re a hair under 2%, it’s worrisome to imagine how this is going to end.

I love talking about this stuff so if you have any questions please get in touch. Otherwise, have a lovely day.

Here is a link to the Bank of Canada release:

Should you lock in your variable rate mortgage?

The past 8 months have seen the most rate increases by the Bank of Canada in over a decade.

Amidst worries of inflation finally starting to creep in with our American neighbors, and concerns that, after 35 years of declining rates, this long term declining rate trend may finally be reversing, the question of whether to lock in that variable rate that has done so well for borrowers has become a valid concern. In this blog we’re going to give some perspective to these rate increases, outline reasons for & against future increases & discuss the questions you should ask if considering locking in your own mortgage.

We are currently just off the basement of a multi decade long term trend of declining interest rates, which began in 1981 when prime rate dropped from its high of 21.25%. Since then, the overall course has been down & we have hit historical lows for interest rates in what has been an unprecedented experiment in central bank policy. In fact, over the 5000 years of interest history, the world is at the lowest level ever recorded. From that perspective, one would assume we’re closer to the end of this long term cycle than the beginning, but the question is what is going to happen in the near term.

Central bankers use interest rates as the levers of the economy

– lowering rates incent borrowing which leads to spending & investment, while raising rates are used to slow the economy & reel in inflation. While Canada had a far better year than expected in 2017, we are facing some major headwinds to overcome in the year ahead. For one, rising rates slows housing, which has been a big driver of the economy to this point. Higher rates can also strengthen the loonie, which negatively impacts exports & therefor manufacturing.

There is also the overall indebtedness of Canada to consider. Too many rate increases too quickly can effect repayment of loans & put Canadians under water on their debts. Additionally, NAFTA renegotiation & the lowering of the corporate tax rate in the States (making Canada less competitive) are two other pressing concerns for our economy. Overall, there is anything but an assured path to aggressive tightening of interest rates in the short term.

To get a sense for where rates might be heading, we can look to the yield curve.

The yield curve plots short to long dated government bond yields (interest rates are priced off of these bond yields). A normal shaped yield curve is upward sloped & indicates investors expect longer maturity bond yields to be even higher in the future. Despite the short term yields rising roughly 1% over the last year in Canada, long dated bond yields have barely moved. The yield curve is still relatively flat, which suggests investors are not optimistic for long term growth & therefore skeptic to see higher interest rates.

The best research on fixed versus variable has come from York University professor Dr Moshe Milevsky. He found that borrowers were better off taking a variable rate over a longer term fixed rate nearly 90% of the time. Fixed rate borrowers pay for stability, while those with a higher risk tolerance, who can handle fluctuations to their payments, would benefit from that uncertainty by paying less interest. Years later he updated his study to determine if borrowers would be better off trying to time the market & lock in their variable mid-term. Even under the generous & unrealistic assumption that borrowers would be able to accurately forecast the future of interest rates, he found that individuals who attempted to lock in & time the market underperformed (83.3%) those who stuck with the variable (88.1%) & rode out their term.

Accurately predicting interest rates is one of the hardest things to do in all of finance.

You could be right in timing the bottom of this 36 year trend within 5% & still be off by 22 months. Given that fixed rates are priced off bond yields, and that the bond market has generally priced in increases by the Bank of Canada before they have happened (meaning fixed rates will go up before you’ll hear talk of prime rate increasing), don’t bother trying to time the market. Take a fixed term mortgage & sleep easy knowing exactly what your payments will be for the coming term, or take the variable & don’t worry about the impossible task of trying to time the market. Choose a path & stick with it.

Bank of Canada Rate Increase 07/12/2017

As I’m sure many of you have heard, for the first time in 7 years the Bank of Canada has raised its key lending rate by 0.25%, which ultimately impacts variable rate mortgages & lines of credit, as prime rate will go up accordingly. This increase comes at a time when Canada is experiencing the lowest inflation level in nearly 20 years & in that sense, this move breaks from tradition. It is clear the Bank of Canada wants to raise rates pre-emptively to try claw their way out of this ultra low rate environment they have created & regain some ammo while they can before another slowdown hits the economy.

What does this mean to you? With the exception of one instance in the late 80s, the variable rate has always been a cheaper path than the 5 year fixed. While you do have the option to “lock in” to a fixed rate, you would be doing so into a higher rate & payment than you have currently.

Those riding the variable rate train have benefitted from some of the lowest interest rates in Canada’s history over the past 9 years. While, psychologically, a rate increase can drive many to panic, keep in mind that a 0.25% increase in rate translates to $12 / month for every $100k of mortgage (amortized over 25 years). In 2010 prime rate rose to 3%, remained there for 4½ years then dropped to 2.7%.

One of the greatest benefits of a variable rate mortgage is exit strategy as the penalty to break the term is just 3 months of interest. Under that light, a fixed rate mortgage can often be riskier path. If there is any uncertainty over the remainder of your term, this is something I urge you to weigh heavily.

There is no shortage of uncertainty in our world right now, both politically & economically. Central banks around the world find themselves in the extremely difficult position of needing to unwind their balance sheets & raise interest rates at a time when core measures are not exactly strong. The deflationary headwinds outweigh the tailwinds in my view so until there are greater reasons for optimism, my advice is to stay the course.

If you have any questions at all, please do not hesitate to get in touch.

Bank of Canada Rate Announcement

April 15, 2015

Following today’s Bank of Canada’s announcement that it will hold overnight rates steady at 0.75%, Dominion Lending Centres’ Chief Economist, Dr. Sherry Cooper, says the outlook is unclear for the Canadian economy and the prospects for a potential rebound in the second half of 2015 are still uncertain.

The Canadian economy has experienced a substantial slowdown in recent months due to drops in the price of oil, and Dr. Cooper expects that any changes to the nation’s economic performance will likely be a result of an improvement in non-energy sectors emanating from the weakness in the Canadian dollar.

“While March employment in Canada improved substantially, business investment remains disappointing,” added Dr. Cooper. “The Bank of Canada has suggested that we will see a transition towards positive growth in exports and capital spending by non-energy producers—both boosted by the depreciating Canadian dollar, but in the near-term, incoming data will likely confirm continued weakness in the manufacturing sector, particularly in autos, and only modest growth in retail sales.”

Dr. Cooper reiterated her confidence in the Bank of Canada’s monetary policy strategy for 2015, despite the current weakened status of the Canadian economy: “I am cautiously optimistic that the Bank has got it right, but I continue to believe that the risks are on the downside for the economy and inflation. My forecast for Canadian growth this year is 1.5 percent–below the Bank’s 1.9 percent forecast. Much hinges on the U.S. economy.”


Ryan Zupan
Mortgage Planner