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- Aug 22, 2007
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Benjamin Tal (of CIBC World Markets) has always provided REIN Members with insights and knowledge that is just general, but is often very specific in nature and once again he has come through. Here is the latest on interest rates and mortgage interest rates from an e-mail he has sent out:
So far, the Bank of Canada has resisted cutting rates despite growing pressure from the public and politicians.
The key factor here is the twin impacts of a rapid increase in the value of the dollar and the slowing US
economy. Also note that the credit crunch meant that borrowers were not able to get the full benefit of the
recent decline in bond yields. Spread between fixed-term mortgage rates and bond yields have risen to levels
not seen in more than 30 years, as banks tried to maintain profitability in an environment of rising cost of
funds. While the Prime-BA spread is now back to normal, the cost of funds facing financial institutions for term
loans has risen by an estimated 25 basis points since July 2007.
So what does all this mean? First, at the minimum, interest rates in Canada will remain stable in the near-term,
with a real possibility of a rate cut in the coming months. As well, it’s not unthinkable that in the next few
months, financial institutions will ease somewhat the premiums over fixed-term loans.
From a practical perspective this means that being on the sideline (say by taking a variable rate mortgage) for
the next few months is not a bad idea. The likelihood that both the prime rate and bond yields will rise during
that period is low, and there is a real likelihood that they might be somewhat lower, either via a Bank of
Canada rate cut or some easing in spreads.
Benjamin Tal
Senior Economist
So far, the Bank of Canada has resisted cutting rates despite growing pressure from the public and politicians.
The key factor here is the twin impacts of a rapid increase in the value of the dollar and the slowing US
economy. Also note that the credit crunch meant that borrowers were not able to get the full benefit of the
recent decline in bond yields. Spread between fixed-term mortgage rates and bond yields have risen to levels
not seen in more than 30 years, as banks tried to maintain profitability in an environment of rising cost of
funds. While the Prime-BA spread is now back to normal, the cost of funds facing financial institutions for term
loans has risen by an estimated 25 basis points since July 2007.
So what does all this mean? First, at the minimum, interest rates in Canada will remain stable in the near-term,
with a real possibility of a rate cut in the coming months. As well, it’s not unthinkable that in the next few
months, financial institutions will ease somewhat the premiums over fixed-term loans.
From a practical perspective this means that being on the sideline (say by taking a variable rate mortgage) for
the next few months is not a bad idea. The likelihood that both the prime rate and bond yields will rise during
that period is low, and there is a real likelihood that they might be somewhat lower, either via a Bank of
Canada rate cut or some easing in spreads.
Benjamin Tal
Senior Economist