Reading Tea Leaves: Bank of Canada Rate Biases

Bank of Canada Rate Biases

When the Bank of Canadatalks rates, analysts hang off of every word. They pay special attention to biases in the Bank’s wording (i.e., which way the Bank is leaning on interest rates).

The media loves to pump commentators for predictions on whether the BoC will keep its rate “bias,” not keep its bias, do something unexpected with its rate bias, and on and on. It’s quite the drama over what is usually a 1-3 sentence statement in a BoC press release.

On Wednesday, the Bank of Canada left Canada’s key rate alone. It also chose to leave its 13-month-long rate hike bias intact, saying:

“…the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”

The question some may be wondering is, should this sort of statement mean anything to the average mortgage consumer?

In short the answer is “usually not.” And here’s why.

The Problem With Biases

Deciphering the Bank of Canada’s forward-looking rate guidance generally reveals few clues that can help with a mortgage strategy.

For one thing, the Bank’s statements have to be interpreted correctly. Most of the time, they’re so vague that they offer minimal predictive value (the quote above is case in point).

Then, there’s the small matter of accuracy. The BoC sets its key rate based on where it sees inflation 18-24 months down the road. But most of the time (especially these days) there is virtually no data that gives the Bank of Canada clarity on inflation two years ahead.

Indeed, despite employing the best data/technology and some of the top analysts in the country, the BoC (like most economists) has tended to be over-optimistic with longer-term forecasts.

And then there’s the question of how long a rate cycle will last. It’s great to know that the BoC may hike rates next quarter, for example, but how long will rates stay elevated? When will they revert lower again?

In most cases, these factors make it hard to read too much into the BoC’s rate guidance—especially since its biases can change without notice (due to unforeseen events or crises).

Read more here ... Canadian Mortgage Trends

B of C Rate Announcement: Overnight Rate Maintained

Bank of Canada Rate Announcement

Bank of Canada Interest Rate Announcement - May 29, 2013 At 10:00 am EST, Wednesday May 29th, 2013 the Bank of Canada again did what we expected them to do… they maintained their overnight rate.  What this means to you if you have a floating / variable rate mortgage, line of credit or student loan is that your rate will not change and remains based on prime rate at 3.00%.  This is great news as you still have a great low rate and so continue to make the most of the low payments you will still have.  Don’t forget as always we recommend you chat with a financial adviser about a Tax Free Savings Account or some RRSP contributions to trigger a potential income tax refund next year as your payments continue to remain low!  If you don’t have a financial adviser, let us know and we’d be happy to recommend one to you.  Here is an excerpt of the announcement from the Bank of Canada and what they had to say about their decision: “In the United States, the economic expansion is progressing at a modest pace, with continued strengthening in private demand partly offset by fiscal consolidation. Japan’s economy is beginning to respond to significant policy stimulus. Europe, in contrast, remains in recession. Growth in China has continued to ease from very strong rates, weighing somewhat on global commodity prices.” Based on this news and the continued slack in the Canadian economy and the muted outlook for inflation, the Bank does not expect to increase their rate in the foreseeable future with any change most likely to occur possibly as late as Fall 2013 to early 2014!   Remember, that any increase to the prime rate since 1992 has only been by 0.25% at any ONE time, so you won’t see a large significant increase all at once. Fixed rates haven’t changed much at all since the last announcement, at around 2.89% for a five year fixed term. If you currently have a variable rate mortgage, we’d recommend that you either stay with your current variable rate product as your interest rate is likely lower than a fixed term rate right now, or consider locking into a low rate fixed to take advantage of the security and peace of mind.  If having a fixed payment is important to you, call us so we can calculate what your new payment would look like and also if it is suitable for you.  If you have a fixed rate mortgage and you would like to lower your monthly payment, reduce your amortization, switch lenders etc, we are here to help you.  Please call us and ask for your “free mortgage review”.   Sometimes there are simple changes that can be made with no cost to you that will improve your financial situation.  The next announcement on any change to the prime rate is July 17, 2013 at which time we’ll be in touch again. We would hope you and your family have a great summer, and we look forward to speaking with you again soon. Warm regards, Chana Fay Charach, AMP President VERICO Synergy Mortgage Inc. Office Tel: 604.269.9419 chana@synergymortgage.ca www.SynergyMortgage.ca PS:  We would like to ask you a favor – rates are still low right now and so it is a great time for refinancing, first time homebuyers or buying an investment property especially as we can hold rates for up to six months, if you know someone that is looking for advice on their mortgage options, with no obligation, would you mind passing our contact information on to them – Your referrals are the biggest compliment we can receive and are much appreciated.  We also have some very attractive “Quick Close Rate Specials”. E. & O.E. © Copyright 2013 VERICO Synergy Mortgage Inc.

B. of Canda Update ... Steady as She Goes!

Update courtesy of Matthew Chan! ... Thanks Matt!

Good morning  Jim:

As you know, your variable rate mortgage, line of credit and/or student loans are all based on the Prime Rate and, as promised, here is your personal update from me on the recent Bank of Canada announcement on changes to their Overnight Rate which in most cases impacts your Prime Rate.

At 9:00 am EST, Tuesday December 4th, 2012, the Bank of Canada again did what we expected them to do… they continued to maintain their overnight rate.  Here is a link to an article from the Financial Post on this rate change:
http://business.financialpost.com/2012/12/04/bank-of-canada-holds-rates-as-growth-slows/

What this means to you is that once again the prime rate on your mortgage, line of credit or student loan will not change and remains at 3.00%.  This of course is fabulous news but don’t forget to make the most of the low payments you still have as the rate will increase in the future.  I recommend you chat with a financial advisor about a Tax Free Savings Account or some RRSP contributions to trigger a potential income tax refund next year as your payments continue to remain low!  If you don’t have a financial advisor, let me know and I’d be happy to recommend one to you.

Here is an excerpt of the announcement from the Bank of Canada and what they had to say about their decision:
“The economic expansion in the United States is progressing at a gradual pace and is being held back by uncertainty related to the fiscal cliff.   Europe remains in recession, Chinese growth appears to be stabilizing and global financial conditions remain stimulative, though vulnerable to major shocks from the U.S. or Europe.    In Canada, economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector... the pace of economic growth is expected to pick up through 2013. The expansion is expected to be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.”

Even though Canada’s economy was slower than expected in the last quarter, the bank still expects it to pick up momentum in 2013.  They are unlikely to increase their rate in the foreseeable future with any change most likely to occur sometime in mid to late 2013.  Remember, that any increase to the prime rate since 1992 has only been by 0.25% at any ONE time, so you won’t see a large significant increase all at once.

Fixed rates haven’t changed much at all since the last announcement, at around 2.99% to 3.29% for a five year fixed term.

Based on this recent announcement, and the anticipation that the prime rate will still remain low for a while now, unless you feel otherwise, I’d recommend that you remain with your current variable rate product as the interest is lower than a fixed term rate right now.  However, if having a fixed payment is important to you, call me so I can calculate what your new payment would look like and also if it is suitable for you. The next announcement on any change to the prime rate is January 23rd, 2013 at which time I’ll be in touch again.

I wonder if I can ask a favour – rates are still so low right now and it is a great time for refinancing especially to consolidate high interest debt or buying an investment property, as I can hold rates for up to six months.  If you know of someone that is looking for advice on their mortgage options, with no obligation, would you mind passing my contact information on to them – this is very much appreciated.

I’d like to take this opportunity to wish you and your family a very happy holiday and extremely prosperous 2013.

Yours truly


Matthew Chan, AMP, CA, MBA
Mortgage Planner

Dominion Lending Centres - Downtown Financial
Tel: (604) 773-2775
Fax: (604) 648-9553
Email: matt@mortgageplan.ca
Web: www.mortgageplan.ca

The BoC’s Coté On Risk & Household Debt

The BoC’s Coté On Risk & Household Debt

 From Canadian Mortgage Trends

Since the credit crisis, the Bank of Canada has stepped up efforts to quantify the risk lurking in our financial system.

Deputy Bank Governor Agathe Côté spoke about this Tuesday. 

She explained how the BoC models risks and provided the following factoids on Canadians’ debt exposure.

She said:

“…While record-low interest rates in recent years have contributed to a relatively low aggregate household debt-service ratio, the share of Canadian households that are considered most vulnerable - those with a (total) debt service ratio equal to or higher than 40% - has climbed to above-average levels, as has the proportion of debt held by these vulnerable households.”
(The proportion of indebted households with debt-service ratio ≥ 40% was just about 6% on Dec. 31, 2011. Just for perspective, the maximum allowable debt ratio on a standard mortgage application is 44%.)
If interest rates were to rise to 4.25% by mid-2015, then:

• the share of highly indebted households would rise from slightly above 6% in 2011 to roughly 10% by 2016

• the proportion of debt held by these households would rise from 11.5% to about 20% over the same period.

“…Household loans in arrears would more than double under a severe labour market shock similar to that observed in the recession of the early 1990s.”
(That said, double the latest 0.34% arrears rate would still be far less than the modern-day high of 1.02%. The BoC also admits that its models don’t assume that distressed households will sell their homes to avoid default—a realistic option for indebted families with marketable homes and sufficient equity.)
Research shows that combining real estate prices and the credit-to-GDP gap (i.e., the difference between private sector credit and its long-term trend) provides “among the most reliable indicators of financial stress.”


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