June 8th, 2004

Bank of Canada's overnight rate stay's at 2%
Expert says that now may be the time to lock in a long-term mortgag
e

By Peter Diekmeyer o Bankrate.com

The Bank of Canada stayed the course today, leaving its target for the overnight rate unchanged at 2%, while cautioning that higher oil prices could lead to higher inflation in coming months.

The move, made after three consecutive 1/4% cuts since the start of the year, comes at a time when many think that mortgage rates may have bottomed out. And at least one expert is telling clients to consider locking into a long-term mortgage.

The Canadian economy has been meeting the bank's expectations, as announced in its April Monetary Policy Report. These call for growth to reach 2 3/4% during 2004 and 3 3/4% during 2005.

The big exception has been stronger than expected world oil demand and geopolitical uncertainty, which have driven up oil prices. As a result, total CPI inflation during the next several months will be higher than originally expected.

"All things considered, the outlook for economic growth and core inflation is essentially unchanged," said the bank in a statement announcing its rate decision. "The bank continues to project that the core inflation will move back to the 2% target by the end of 2005."

According to Stéphane Marion, an analyst with National Bank Financial, the statement shows that despite high oil prices, the bank remains committed to maintaining a loose monetary policy that will make it easier for businesses adjusting to ongoing changes in the Canadian economy.

"Inflation pressures remain extremely tame," said Marion. "The Bank of Canada has room to maneuver (if it chooses to)."

Nevertheless Marion's forecast calls for the bank to hold steady during its next announcement and to raise rates by 1/4% in September.

Effect on consumer loans

Bank of Canada interest rate moves do not generally affect consumers directly, because consumer loans tend to be tied to movements in the bond market.

However according to one exert. Today's Bank of Canada decision may be an indication that time is running out for Canadians who want to take advantage of historically low interest rates.

"The trend is certainly on the upside," said Andrew Moor, president and CEO of Invis, Canada's largest independent mortgage brokerage

Moor should know. Invis's 550 mortgage consultants helped clients take out $3.7 billion in mortgages last year, and they watch rate moves like hawks.

According to Invis's data, six weeks ago the average discounted rate for five-year fixed rate brokerage mortgages was 4.72%. But since then the rate has spiked to 5.23%.

That difference may not seem like much, but for homeowners carrying a $150,000 mortgage it works out to $43.50 a month, or $2,610 over a five year term.

"We normally recommend variable rate mortgages, which have been shown to be cheaper historically," said Moor. "But as we had into a rising rate environment longer terms are certainly worth considering."

The Bank of Canada's next rate announcement will be made on July 20th.

 

 

Previous Bank of Canada action:

Date Action Overnight rate (after announcement)

June 8, 2004 No change 2%
April 13, 2004 -1/4% 2%
March 2nd, 2004 -1/4% 2 1/4%
January 20th, 2004 -1/4% 2 1/2%
December 2nd, 2003 No change 2 3/4%
October 15th, 2003 No change 2 3/4%
September 3, 2003 - 1/4% 2 3/4%
July 15, 2003 - 1/4% 3%
April 15th, 2003 +1/4% 3 1/4%
March 3rd, 2003 +1/4% 3%

 

Schedule of upcoming Bank of Canada rate announcements:

July 20th, 2004
September 8th, 2004
October 19th, 2004
December 7th, 2004

peter@peterdiekmeyer.com

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