Canadian Interest Rates Forecast 2012

Bank of Canada governor, Mark Carney, has been warning about household debt since 2010 or ever since our benchmark interest rate settled at 1%.  Unfortunately for Carney, besides repeating his dire warnings, there’s not much he can do right now because a few variables are forcing him to stay the course for longer than anticipated. The most important factor tying the governor down is the pledge of the Federal Reserve to keep interest rates near zero until late 2014. That’s a 1 year extension from the original pledge. It is clear that the Bank of Canada has very little manoeuvring ground with interest rates simply because any one sided hikes will be painful for manufacturing and exports particularly now that our currency is trading at parity with the USD. The governor will have to be very patient before raising the Canadian benchmark rate which means for 2012 an interest rate hike is highly unlikely.

All is not well

The world is about to end again, well you would get this impression only if you were following the stock market. The TSX wiped out its advance for the year as markets signal all is not well in Europe. We all know the debt issues in Europe are not totally fixed with Spain emerging as the next candidate in line for a “Greek Drama” this summer. Investors will need reassurance in the form of action from the ECB as well as improving employment numbers and decent quarterly earnings in the US as a sign the recovery might have been shaken but not broken.

Taking Advantage

What does this mean for you? Well if you’re in debt, you still have time to get it under control. Got a mortgage with a variable interest rate? Chances are you will continue saving tons of money well into 2013. In my case, my variable rate mortgage that I took back in 2008 is due for renewal in 2013 which means 5 years of lofty savings! We all know rates will end up rising eventually so make sure you’re benefiting from this period by putting your savings back to work reducing outstanding debt and making lump sums on your mortgage. For those amongst you who are fans of saving money in low risk vehicles, you’re going to have to wait a few more months until you get to enjoy a small pay raise.

A Wild Card

You might have noticed Carney’s speech was more upbeat than usual on April 2 as he saw a stronger Canadian economy than the bank expected but he also warned that “The bank will take whatever action is appropriate to achieve the 2 percent CPI inflation target over the medium term,” This is where the price of oil comes in as a variable that could contribute to freezing the current benchmark rate. Strong oil prices are currently buoyed by tensions with Iran but the price of oil will deflate nicely if a showdown is avoided with the Islamic republic as the risk premium to supplies disappears. This obviously contributes to a lower inflation rate as gasoline prices drop leaving Carney pretty comfortable in keeping rates as is for longer given the strong CAD environment we are in right now. On the other hand, if the situation with Iran degenerates into all out war, oil prices will explode higher taking our Petrodollar along with it and making an interest rate hike a lot harder.

Conclusion

My forecast stands equal to everyone else’s forecast from banks to economists as they are what they are: predictions. However, even though the underlying variables can change pretty quickly, I do not expect the US economy to magically generate more than 300,000  jobs per month or for Europe to live happily ever after without going through some pain first especially when Italy, Spain and Portugal are all candidates for ADD this year. All in all, every variable points to a stable Canadian interest rate environment with no hikes in view for the rest of 2012 and potentially well into the first half of 2013.

What’s your take on interest rates?

12 comments to Canadian Interest Rates Forecast 2012

  • The five year variable rate at ING equals my HELOC rate (prime+0). Thus, there is no reason for us not just simply to roll over our entire mortgage to the line of credit; that is if we want to have a variable rate. On the other hand, five-year fixed 3.49 (3.25 for 4 years)at ING is a fabulous, and the extra $60 a month could save me thousands if interest rates were to go up. Seems like a no brainer to try to get a fixed rate at closed to prime, lock it down, and pay the extra every month as an insurance policy against rate changes. (We have a mortgage due in July).

    • Mich

      My mortgage will be renewed in 2013, still haven’t decided yet if I roll it into my HELOC or just lock down a very low fixed rate for 3 or 5 years. Theoretically, by mid next year the outstanding amount would be low enough to provide me with the option of choosing one or the other.

      I like your risk free approach and think it is the way to go particularly if the mortgage is above $100k.

      Cheers!

  • I suspect rates will climb later this year, 25 basis points.

    I’ve got a 5-year fixed, at 3.3%. I figure that’s not too bad. I’m in it for another 4 years. I often kick myself I didn’t take variable, especially where rates have been, and still are.

    You’re in a good position Mich, to kill that mortgage over the next few years. Kudos to you my friend.

    • Mich

      Thanks Mark, your rate is actually pretty good so you’re not missing much really. Your 25bps prediction in the second half of the year might happen but I am willing to bet it won’t :) No hikes this year!

  • […] Beating The Index discussed the Canadian interest rate forecast for 2012. […]

  • Although a 5 year fixed at 2.99% is tempting, we have 4 years to go at variable and 2.3% isn’t too shabby. Even a full 1% rise doesn’t put us at a disadvantage relative to fixed, and I’m not sure that a 2% would if it happened, say, 2 years down the line.

    You think the cheap money’s going to dry up sometime?

    • Mich

      Eventually, it will dry up. The central bank will be methodical with the hikes so one has time to lock in a fixed rate if he feels an upwards trend has begun.

  • Sound analysis as usual. You correctly pointed out that the decision on interest rates really has nothing to do with what how strong Canada is, and has everything to do with the USA economy. Our export economy simply can’t handle a higher dollar, so there is simply no way we can raise rates much faster than the USA which has committed to low interest rates unless 2013. I would be very surprised to see anything more than a 50 point raise even in 2013. Instead, Carney just warns and preys that we don’t hang ourselves with cheap money.

    • Mich

      Totally inline with your thoughts MUU, any rate hikes will be limited even in 2013 at the risk of hurting our own economy and exports.

  • […] Yet here we stand with Canada’s rates frozen in time and if you’ve read my last set of interest rate predictions, I believe they’re going nowhere […]

  • Will Canadian Mortgage Rates Rise Soon? | BeatingTheIndex.com

    […] to the bank to complete a mortgage loan application now, it is important to note that it can be difficult to accurately predict exactly what rates from the Bank of Canada will do. In fact, at the end of 2011, the MBA predicted […]

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