It’s Status Quo for Prime Rate

Here’s the latest on today’s Bank of Canada rate announcement:

• Rate Decision: No change in rates
• Prime Rate: Remains at 3.45%
• Market Rate Outlook: Two more hikes in 2018
• BoC GDP Outlook: 2% growth in 2018 and 2019; 1.8% in 2020
• BoC Statement: Click here
• The Money Quote: “…Developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target. Governing Council will take a gradual approach to policy adjustments, guided by incoming data…”
• Next Rate Meeting: July 11, 2018

The Spy’s Take: The BoC is clearly inclined to lift rates at least once or twice more this year. It’ll then sit back and monitor the data—like the rest of us—for guidance on whether higher rates remain warranted.

Rate Wildcards:

1. European turmoil
   • The Greek debt crisis demonstrated how global sentiment and growth can be hurt by one little country
   • Now there’s new economic risk brewing in Europe (more on that), which has driven down interest rates worldwide
2. The US/Canada trade agreement
   • Worst case, NAFTA disintegrates and the U.S. imposes painful tariffs on Canada
   • That would be unquestionably bearish for Canadian rates
   • The best case is something near the status-quo that could let Canada further benefit from U.S. economic resurgence (this could be inflationary, other things equal, and bullish for mortgage rates)
3. U.S. outperformance
   • Trump, like him or hate him, is injecting nitrous oxide in the U.S. economy with job-creating U.S.-first policies
   • That could prop up U.S. inflation and yields in the medium term (other things equal)
   • Canadian yields are >90% correlated with U.S. yields
4. The Unknown

The Term to Beat: Remains variable. We’re not convinced inflation is fully contained, but with a 1.00+ percentage point discount from the best 5-year fixed rates, variables are worth the gamble (assuming you meet the standard variable vs. fixed mortgage criteria).

Fixed Rate Outlook: Bond yields fell out of bed yesterday. On a one-week basis, they’re down the most since the oil crash of January 2015. That is bearish for fixed rates, so expect better fixed pricing this week. Fixed rates won’t reach new heights until the 5-year yield exceeds 2.35%, which is now more than a quarter point above us.

Should You Lock In?

• If you’re already in a variable and not at risk from potentially higher rates, stay put.
• If you’re a new well-qualified borrower, think variable, particularly if you can find one below 2.30% (which all the top online brokers are offering).
• If your debt ratios are above average and you don’t have a big financial safety net, hunt for cheap 5-year fixed rates.
• If you’re on the fence and need an insured mortgage, you’ll find great value in a 5-year hybrid mortgage (half variable and half fixed). The diversification benefit of a deep-discount hybrid is hard to beat.