More Hinting At An Interest Rate Hike

The Bank of Canada held its key lending rate steady at 1.00% yesterday, which came as no surprise to economists across the country.  This leaves Canadians with a prime rate of 3.00% for at least another seven weeks until the Bank of Canada meets again on September 7th.

While economists unanimously predicted that interest rates would hold firm, it was the Bank of Canada’s official statement that everyone was watching.  I found it interesting that experts can pick out one or two phrases from these statements and determine whether or not the Bank of Canada is hinting at a future interest rate hike.  It’s like trying to unlock the Da Vinci Code.

Interest Rate Hike Hints

Canadian Mortgage Trends pulled together the highlights from the Bank of Canada report and tried to show what these interest rate hike hints looked like:

  • The BoC said that some monetary stimulus “will be withdrawn.”  It’s previous wording was “(will be) eventually withdrawn.”
  • “Total CPI inflation is expected to remain above 3% in the near term”
  • “Core inflation is slightly firmer than anticipated”
  • “Core inflation is now expected to remain around 2% over the projection horizon.”
  • “High” commodity prices and “persistent excess demand in major emerging-market economies are contributing to broader global inflationary pressures.”
  • “Household spending remains solid and business investment robust.”
  • “Financial conditions in Canada remain very stimulative”
  • “…the Bank expects growth in Canada to re-accelerate in the second half of 2011.”
  • Canada’s economy will return to “(full) capacity in the middle of 2012.”
  • “…there are clear risks” posed by the “European sovereign debt crisis”

Can you see any possible hints of an interest rate hike at the B0C’s next meeting in September?  With so many moving parts to calculate, how can you possibly take one or two pieces from this statement and determine an outcome in the next seven weeks, let alone in a full year?

Economic Realities

The global economic recovery is still very fragile, with debt concerns in both Europe and the United States.  Canada weathered the storm better than most countries over the past few years, but our economy is still tied to the U.S. and they don’t appear to be in a position to raise their rock-bottom rates either.

The Bank of Canada is in a difficult situation right now because in order to contain inflation they will need to increase the key lending rate.  This triggers interest rates to rise and the dollar to go up, then causing a decrease in demand which leads to lower production, and results in lower prices.  The problem is that an interest rate hike will aggravate two additional problems; the exchange rate and the real estate market, both of which are critical to our economic recovery.

When Will We Take The Hint?

I’ve been reading about the inevitable interest rate hike since early 2009, when the key interest rate went as low as 0.25%.  Economists have been predicting rising interest rates for over two years, and all we have seen are three increases of 0.25% each.  If you look back at previous interest rate forecasts you will see that the key interest rate should be at least 2.00% right now (double the current rate), if not higher.

These interest rate hike signals should be taken with a grain (or shaker) of salt.  We’ve heard the warnings for over two years now and interest rates have barely moved.  I hate to make my own predictions of where interest rates are headed, but I think I’ve heard enough hinting.  Next month I’m confidently locking into a discounted 5-year variable interest rate mortgage.

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1 Comment

  1. Balance Junkie on July 20, 2011 at 6:54 am

    I’m with you Echo. I’ll believe it when I see it and I put my money where my mouth is with a variable rate mortgage on our new home.

    I would love to see rates normalize because that would mean more stability has come to the financial system. Alas, that’s not the reality.

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