Almost every public statement the Bank of Canada makes is scripted.
Case in point was the speech today from the Bank of Canada’s Senior Deputy Governor in Winnipeg. She came with prepared remarks that were broadcast all over the Internet. Her (and the BoC’s) mission is clearly to get people thinking about rate hikes—more specifically, that rates will rise before they fall.
That’s the motivation behind messages like this:
“As growth continues and, ideally, broadens further, [the Bank of Canada] will be assessing whether all of the considerable monetary policy stimulus presently in place is still required…“
—Bank of Canada Senior Deputy Governor, Carolyn Wilkins, June 12, 2017
That’s far more hawkish than the BoC’s widely reported statement in January, which was:
“Yes, a rate cut remains on the table…“
—Bank of Canada Governor, Stephen Poloz, January 18, 2017
Before we start the debate about locking in mortgages, some perspective is in order:
- Remember that the Bank of Canada is no economic psychic. Following the recession, whenever it has prognosticated higher growth it’s usually had to revise those estimates lower. In truth, its forecasts are reactionary (i.e., at the mercy of the latest data), just like the forecasts of any other economist.
- Despite Wilkins’ reassuring words that the recessionary effect of cheap oil is “largely behind us,” that could change in an instant. If/when oil dips below $40, the BoC’s bullishness could turn to bearishness overnight. A bad trade deal with the U.S. could engender a similar effect.
- Inflation is the #1 rate driver in any case. And although inflation is a lagging indicator, it’s still incredibly suppressed at just 1.4% (the average BoC core reading). For rate hikes to be a real threat, the BoC has to believe inflation could pole vault to roughly 2.5% or more within about 18 months or so. And it doesn’t seem to believe that, at least not yet. It wants to see more positive data first.
Either way, bond traders didn’t like what they heard from the BoC today. They dumped 5-year bonds like last week’s garbage. That drove up bond yields 11 bps, the most in almost two years. As regular readers know, bond yields move inversely with bond prices, and are a key driver of fixed mortgage rates.
Bond market derivatives (overnight index swaps) now imply more than a 50% chance of a BoC rate hike by December.
That’s a big sudden sentiment shift and it could potentially trigger a mini uptrend in fixed mortgage rates. Potentially.
Until the 5-year yield pierces 1.33%, the most we’ll see fixed rates pop is probably 10-20 bps.
On the variable side, prime rate is cemented at 2.70% and should remain so until the Bank of Canada’s next rate move. It hasn’t hiked rates in seven years and nobody expects it to near-term, certainly not at its next meeting on July 12.
The takeaway: While the BoC has started telegraphing its rate-tightening bias, it’ll take further robust economic numbers before rate hikes are imminent. We’ll let you know if that happens.