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Canada’s lowest-ever variable mortgage rates could soon be a fond memory

April 23, 2010 by  
Filed under Recent News

Canada’s lowest-ever variable mortgage rates could soon be a fond memory. Eleven out of 12 analysts polled by Reuters now predict a June 1st rate hike. (Minds change quickly. Before yesterday’s Bank of Canada announcement, it was only three out of 12.)

Swap traders – who bet millions on interest rate direction – are pricing in a 93% chance that the BoC lifts rates on June 1st.

The analysts also predict a 100 to 175 basis point jump in the overnight rate by year-end. That suggests a 3.25% to 4.00% prime rate by New Year’s, give or take 25 bps.

Click here to read more in the Vancouver Sun.

TORONTO — Most of Canada’s primary securities dealers now say the Bank of Canada will raise interest rates in June instead of July after the bank on Tuesday dropped its conditional pledge to hold rates steady.

In a Reuters poll conducted after the central bank announced it was jettisoning the pledge, 11 of 12 dealers surveyed by Reuters said they expect the central bank will boost rates on June 1. That is up from the three who forecast a June rate hike in a Reuters poll conducted on April 15.

On Tuesday, the bank left its key rate unchanged at 0.25%, where it has sat for the past year.

“The Bank of Canada has abandoned its conditional commitment two months ahead of schedule and that’s a clear indication it’s not comfortable delaying hiking,” said Eric Lascelles, chief Canada macro strategist at TD Securities.

One dealer said rates would stay on hold at the June meeting. RBC Capital Markets said the probability has clearly risen for rates to rise earlier, but it maintained its forecast for the first hike to come in July. It said the consumer price index data for March this Friday may alter its views.

All dealers see rates rising at least 25 basis points on both the bank’s July and September policy announcement dates.

Before Tuesday’s statement, eight of Canada’s 12 primary dealers had predicted the first rate hike would be in July, while one had expected it would come in September. In the announcement, the bank offered a more hawkish economic outlook by raising its growth and inflation forecasts.

If the bank does raise interest rates in June, it would become the first G7 central bank willing to unwind emergency stimulus measures as the economy emerges from recession.

“The bank has gone hawkish on pretty much all fronts here. They’re signaling they’re worried about their inflation target,” said Derek Holt, vice president economics at Scotia Capital. “In order to get to have (inflation) go from potentially overshooting 2% until the middle of next year and then back to the 2% range, they need to take the punch bowl away more aggressively than what the markets are pricing.”

Markets are already pricing in a high probability of a June rate hike. Yields on overnight index swaps, which trade based on expectations for the central bank’s key policy rate, edged higher after the bank’s statement was released and now suggest there is a 93% chance of a June rate hike.

50 BPS HIKE IN ONE SHOT A POSSIBILITY

Dealers’ forecasts for the overnight rate at yearend ranged from 1.25% to 2%. That reflects either a “steady diet” of 25 basis point increases until the end of the year, as HSBC economist Stewart Hall expects, or one-shot 50 basis point moves later in the year.

CIBC World Markets moved up its view for the first rate hike to June from July based on the central bank’s Tuesday statement, but did not expect rate hikes through to the end of the year.

“We don’t fully share the Bank of Canada’s optimistic take on growth beyond the first half of this year, and expect evidence of a more moderate growth track to allow the BoC to stick with only 25 basis point moves and to take a pause on rate hikes after October,” said Avery Shenfeld, chief economist at CIBC World Markets.

Some dealers see a strong chance the bank could make larger hikes of 50 basis points, given the strength of the economic recover.

Sheryl King, head of Canada economics and chief strategist for BofA Merrill, said she sees the potential for heftier rate hikes later in the year because of the way the central bank worded its statement.

“They didn’t really give any specific guidance that it’s going to measured or moderate or anything like that,” she said. “They just said the extent and timing is going to depend on the outlook for economic activity and inflation.

COMPANY — FORECAST JUNE ACTION — JULY ACTION — SEPT ACTION

BOA MERRILL LYNCH — UP 25 BPS — UP 25 BPS — UP 25 BPS.

BMO CAPITAL MARKETS — UP 25 BPS — UP 25 BPS — UP 25 BPS.

CASGRAIN & CO LTD — UP 25 BPS — UP 25 BPS — UP 25 BPS.

CIBC WORLD MARKETS INC. — UP 25 BPS — UP 25 BPS — UP 25 BPS.

DESJARDINS SECURITIES — UP 25 BPS — UP 25 BPS — UP 25 BPS.

DEUTSCHE BANK SECURITIES — UP 25 BPS — UP 25 BPS — UP 25 BPS.

HSBC SECURITIES — UP 25 BPS — UP 25 BPS — UP 25 BPS.

LAURENTIAN BANK SECURITIES — UP 25 BPS — UP 50 BPS — UP 50 BPS.

NATIONAL BANK — UP 25 BPS — UP 25 BPS — UP 25 BPS.

RBC CAPITAL MARKETS — NO MOVE — UP 25 BPS — UP 25 BPS.

SCOTIA CAPITAL INC. — UP 25 BPS — UP 25 BPS — UP 25 BPS.

TORONTO-DOMINION BANK — UP 25 BPS — UP 25 BPS — UP 25 BPS.

Where do you think the bank’s key policy rate, now at 0.25%, will be at the end of 2010?

BOA MERRILL LYNCH — 1.50%.

BMO CAPITAL MARKETS — 1.50%.

CASGRAIN & CO LTD — 1.50%.

CIBC WORLD MARKETS INC. — 1.25%.

DESJARDINS SECURITIES — 1.50%.

DEUTSCHE BANK SECURITIES — 1.50%.

HSBC SECURITIES — 1.50%.

LAURENTIAN BANK SECURITIES — 2.00%.

NATIONAL BANK — 1.50%.

RBC CAPITAL MARKETS — 1.25%.

SCOTIA CAPITAL INC. — 1.50%.

TORONTO-DOMINION BANK — 1.50%.

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