On Tuesday,  the Bank of Canada left the Prime rate unchanged for the 13^th consecutive meeting.   Mark Carney, the Governor of the Bank of Canada, used this meeting to hint at rate increases coming quicker than most might expect.  It is hard to say whether he was just trying to change public and market behavior with his comments or if he actually intends to begin the process of increasing rates before the end of the year.  Although the recent positive job numbers, reduced potential harm from the European debt crisis, and an improving US economy all lead towards a greater potential for higher rates, the Bank of Canada is in between a rock and a hard place.   The mere mention of potential rate increases caused the Canadian dollar to jump over one cent the day the speech was made.

Carney is increasingly concerned over the household debt levels in Canada and has repeatedly stated that this may be the biggest risk to Canada’s economic prosperity.   The problem is that if rates increase, and they will eventually, then there are a significant number of households that will be in financial difficulty as they are unable to afford increased debt payments caused by higher interest rates.   By increasing the Prime rate, the hope is that households will reduce their debt in preparation for higher rates.    However, increasing the rate will also increase the value of the Canadian dollar which will reduce exports and slow the economy down.    The Canadian dollar is also considered to be a quasi- petro dollar.  This means that due to Canada being a major oil exporter, increases in the value of oil lead to an increase in the value of the Canadian dollar. 

The only thing we know for sure is that rates will normalize eventually, and a normal Prime rate would probably be somewhere between 5% and 6.5%.   This is obviously a dramatic increase but the factors above mean that the Bank of Canada will have to walk a fine line between discouraging household debt & curbing inflation by increasing rates versus allowing the economy to grow by leaving rates alone for a while.  I am still predicting that rates will increase by 2% to 3% over the next five years but the timing and pace of the expected increases is too hard to predict at this time.

 Jason McLean  BSc, AMP
jason@garibaldimortgage.com

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The Greek weeble continues to wobble but does not want to fall down.  Greece finally agreed to undertake even more austerity measures to satisfy the conditions of the most recent bailout terms.  The financial markets were unmoved by this seemingly positive move and  Germany even stated that the measures may not be enough.  In other European news, the Bank of England will spend $50 billion in a new wave of quantitative easing.  Although inflation seems to be waning in the UK, measures like this will eventually bring inflation to the forefront.  As with all the industrialized nations, the governments are walking a fine line between austerity that may improve short term cash flows but hurt economic growth, and stimulus to improve economic growth.    

US job numbers were up this week and slightly positive US economic growth has some people predicting an earlier end to the current economic doldrums.  The US is still in a huge deficit hole but any positive US is always good for Canada since the US is our largest trading partner and the largest customer for all that we sell.  Despite the trend to diversification of our global trading partners, we will be somewhat chained to the US markets for a long time to come.   The Canadian dollar improved slightly this week on this positive US economic news. 

This positive news from the US has also caused Canadian bond yields to increase this week and we may see a few banks remove their super low “special” rates for the time being.  However, fixed rates remain at historical lows and should stay in the current neighborhood for quite a while.  

Variable rates are still available at around Prime less 0.20% but for most clients, fixed rates are a much better choice since the spread between fixed and variable is so small.

Jason McLean   BSc, AMP
jason@garibaldimortgage.com  

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Last Friday, the credit ratings agency Standard & Poor, downgraded nine European nations.  This basically means that these countries, or borrowers, are “officially” no longer considered to be as reliable as they were previously.  Although there was a lot of hullaballoo in the media about the downgrades, the markets were really only affected for a day or two.  This is because the various ratings agencies had been warning of potential downgrades across Europe for the past few  months.   Therefore, the markets had already priced this action into their projections and although further downgrades may occur in the future, the current actions should not have surprised anyone.

Yesterday Spain held a successful bond auction that saw bond yields drop to just under 5.5%, a dramatic improvement from over a month ago when yields were over 7%.  However, Greece remains problematic and is still teetering on the brink of default.  Overall, Europe continues to stumble along with bits of good news popping up here and there.

On Tuesday, the Bank of Canada left the Prime rate untouched and expressed concern about the European debt crisis slowing economic growth in Canada for the next year or longer.  Despite recent positive growth numbers, some pundits are predicting cuts of 0.5% to the Prime rate over the next six months.  I think that the Bank of Canada will remain on the sidelines through 2012, saving their few remaining bullets in case the villain that is negative growth rears its ugly head. 

After one lender announced a 5 year fixed term at 2.99% last week, many other lenders have decreased fixed rates and there are a number of appealing options available.  Two lenders have 10 year fixed terms at 3.89% and 3.99% respectively.  If I was to purchase property now, with the expectation of holding the property for at least 5 years, I would jump all over these 10 year terms.  This is a once in a lifetime opportunity for purchasers to lock in tremendously low rates for a decade.   These lenders are not lending on all Whistler properties but there are attractive options for all buyers at this time.

Jason McLean  BSc, AMP
jason@garibaldimortgage.com 

Comment (32)

As the European boondoggle carries on, I think this is a good time to look at what 2012 holds in store for our currency and interest rates.

Fixed term interest rates should remain relatively stable over the next year.  We may see about 0.25% movement either way depending on a number of factors but 5 year terms should still be available at less

than 4% by the end of the year.  Even if the fixed rates do increase slightly, they will still be near historic lows and should entice buyers to jump into the market.  Existing mortgages coming up for

renewal in 2012 will definitely see a huge reduction in interest rates compared to the rates that were obtained 4 to 5 years ago.

The Prime rate is unlikely to change in 2012 but the differential from Prime for variable rate mortgages will likely continue to become more expensive.  The days of Prime less 0.90% are a distant memory as

current variable rate mortgages are ranging from Prime less 0.30% to Prime plus 0.30%. The premium over time will likely creep up for most of the next year. This will reduce the already low spread between variable rates and fixed rates  and drive more consumers to take the fixed option.

The Canadian dollar will see continued volatility in value against the US dollar in 2012.  As the European saga continues, daily movements of half a cent to two cents will probably be the norm.  Unless a dramatic

improvement is seen in Europe, the Canadian dollar will likely range between $0.915 and par for most of the year.  However, the regular large movements in the value will provide opportunities for spot trades for those looking to take advantage of the volatility.

With the crystal ball being as cloudy as it is, there is always a chance that any number of events will throw a wrench into even the best projections.  Major events that may change the global economic landscape include:

- If Europe is able to get its act together for the next major summit in March, there would be an increase in the Canadian dollar and a greater possibility for fixed rates to rise.

- If the EU implodes or the Euro is abandoned, then the Canadian dollar will likely fall further in value while fixed rates have a chance of decreasing.

- The US election is always a wild card as promises are made by all parties.

- If the "Arab Spring" movement continues to spread to more countries in 2012, oil prices may be the biggest change which will help Canada but also increase inflationary risks globally.

Jason McLean   BSc, AMP
jason@garibaldimortgage.com

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The bond markets of Europe continue to dominate the headlines this week.  Some ten year bond yields decreased significantly earlier this week as the markets were encouraged by this coming weekend’s summit to discuss new measures to solve the current crisis.   Although the markets moved backwards today as expectations on concrete results have been tempered by European Central Bank head Mario Draghi’ s comments about not being an emergency buyer of bonds.   Bonds are essentially formal loans, usually issued by various governments and companies, to fund various activities, projects and service existing debt.  If there are no buyers for a party’s bonds, the,  the price keeps decreasing until someone is willing to buy it.  This means increasing yields to the purchaser of the bonds and increasing interest rates for the bond seller (borrower).   

After at least two years dithering about the debt problems, the main economic players in Europe are finally going to push for greater accountability.  Unfortunately, everyone will have to give up something, even the economic powerhouse of Germany, for the greater  good of the EU and its economic prospects.  It appears that even substantial agreements are made that will push Europe in the right direction, it will take at least a few years to return to decent growth levels.   If and when that happens, the markets will return their attention to the deficit issues of the US but for now the markets are happy to park their funds in US T-bills.  Apparently it is better to deal with the devil you think you know.

The Bank of Canada kept the Prime rate unchanged this week and due to concerns about Europe and the US, it looks like the Prime rate may not change again until 2013.   With volatility being the new normal for the equity and currency markets, Canadian bond yields may move more than usual over the next year but fixed rates should still end next year at levels close to the current situation.

This week, one lender announced a 7 year fixed term rate of 3.89% and a 10 year fixed rate of 4.39%.   If you believe in a 7 year economic cycle, it looks like there are about three to four years left in the current cycle.   This makes either of these terms fairly attractive as a defensive measure against the eventuality that rates must increase. 

Jason McLean  BSc, AMP
jason@gariabldimortgage.com

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