The interest rate outlook for a wide variety of mortgage products – from first and second mortgages, to home equity loans and secured home equity lines of credit – is somewhat muddled, as the Bank of Canada’s plans to gradually raise interest rates and tighten credit to ward off inflation has been discounted by a bond market rally that has driven interest rates lower.
“The rally in bonds, powered by concerns of a weaker U.S. economy,” writes Paul Vieira, of the Financial Post, “has allowed banks, which get their funding in the bond markets, to lower consumer borrowing cost…[as] was evident this week when the country’s chartered banks lowered mortgage rates.”
While the interest rate at which the Bank of Canada makes short-term loans to the banks usually sets the market for a wide range of loans and home mortgage products – such as home equity loans or secured home lines of equity, rather than credit cards and high interest, unsecured consumer loans – major banks and other large lenders recently reduced their interest rates despite the Bank of Canada signaling its intention to gradually raise its rates.
“The question is,” Mr. Vieira observes, “which is the dog and which is the tail?” He asks if Canada’s central bankers will “follow the bond market’s cue and hold off on raising rates at its September [8th] policy announcement,” in view of slowing growth in the global economy, or whether “the bond market [has] gone overboard with the idea that a dramatic slowdown is imminent?”
As has been discussed here, the consensus amongst analysts is that the Bank of Canada will pause in its course of gradual rate increases after September. This is particularly so, if, as it seems clear, the U.S. Federal Reserve is forced to keep its interest rates near zero into next year to avoid snuffing out a sputtering recovery.
For homeowners and prospective purchasers, this means that interest rates on the whole basket of mortgage products is likely to remain low well into 2011, as analysts are predicting, even if the Bank of Canada again raises its interest rates for a third consecutive time in September. It seems improbable that the central bankers can afford (i) to dampen Canadian economic growth which is closely in line with their projections, or (ii) to lose effective control over rates by ignoring a bond rally that is exerting downward pressure on rates in any event.
