Bank of Canada Rate Decision: Flat For Longer

Last meeting, the Bank of Canada finally shifted its rate outlook to neutral. After today’s meeting, the gear shifter is still firmly there.

Here’s a quick glance at what the BoC did today:

• Rate Decision: No change
• Overnight rate: 1.75%
• Prime Rate: Prime rate remains at 3.95%
• Market Rate Forecast: Likely one rate cut by the end of 2020
• BoC’s Headline Quote: “…the degree of accommodation being provided by the current policy interest rate remains appropriate….Governing Council will remain…especially attentive to developments in household spending, oil markets and the global trade environment.”
• BoC on GDP Growth: The bank expects a “pickup starting in the second quarter”
• BoC’s Full Statement: Click here
• Next Rate Meeting: July 10, 2019

The Spy’s Take

The BoC reminds us of a Toronto Maple Leafs fan. Always optimistic and frequently disappointed.

But the best interpreter of the bank’s comments is the market itself. Today’s statement from the BoC won’t change the market’s unambiguous expectation that there’s a greater risk of rates falling in the next year than rising.

That risk is heightened by the facts that:

• up to 17% of Canada’s economic performance could be hit by a worsening Ameri-China trade war
• oil prices have reversed
• U.S. yields look ominous

But with:

• phenomenal jobs numbers
• inflation on target (average core CPI is 1.97%; the target is 2.00%)
• Governor Poloz suggesting rates will need to rise over time…

…there’s too much upside inflation risk offsetting the downside risks to portend any near-term change in the bank’s policy. CIBC economist Benjamin Tal put it this way on BNN today: “I’m not cutting, read my lips. That’s exactly what [Poloz] is telling you.”

But if you ask that great recession predictor, the yield curve, it’s implying that the opposite will be true, eventually.

That Elusive Neutral Rate

The BoC forecasts a mean neutral rate that’s 100 bps higher than today (its neutral estimate is 2.25% to 3.25%). Nothing in today’s announcement suggests we’ll hit that 2.75% midpoint in this rate cycle.

And check out Canada’s yield curve. Here’s a comparison of how it looks today versus last year, from MarketWatch.

Source: MarketWatch

The curve just keeps inverting. If you locked your money into a riskier 10-year government bond today, you’d make 10 basis points less than you would by investing for just three months, in a 3-month bill. That market distortion reflects a stark lack of confidence in the BoC’s ability to hike rates.

It’s also why variable rates, which many consider riskier, are oddly higher than the best 5-year fixed rates.

How to Play It

All signs point to flat rates for as far as the eye can see (which isn’t that far, actually).

And remember, rates can go sideways a long time. Earlier this decade they held at 1.00% for over four years.

In that environment, the play for most well-qualified risk-tolerant borrowers is the same as it was last month. Pick the lowest most flexible mortgage rate that you can find.

For those who can’t afford as much volatility in their expenses, or those with rate-based insomnia, five-year fixed rates under 3% are a sounder bet—especially if you choose a fair penalty lender. Just promise yourself not to have buyer’s remorse if rates keep dropping.