On Tuesday, the Bank of Canada (BOC) made no adjustment to the overnight rate. No increase and no decrease. The announcement from the BOC reminds me of the movie Groundhog’s Day. For the 15th consecutive time there’s been no change to the overnight rate, and it looks like it will be much the same for at least another 14 months. According to the Central Bank, Mark Carney, we will not see any movement or adjustment to the overnight rate until 2014; it is suggested at that time rates will gradually start to rise. Then again the BOC indicated last year that by June of 2012, interest rates would be up by 75 to 100 bps. Correct me if I’m wrong but that doesn’t appear to have happened. I guess their crystal ball is a little murky. Fascinating, we can’t predict, with any certainty, what the weather will be like three weeks from next Wednesday, but we can predict where rates will be in 14 months.
The fact of the matter is that the most recent BOC rate announcement was a big yawn. Ben Bernanke, U.S. Federal Reserve Chairman, recently announced that the overnight lending rate in the U.S. would remain the same until 2014. That was our first clue. The second clue was the most recent changes to mortgage rules here in Canada. Clearly the BOC cannot slow down the housing market in Canada by way of monetary policy, so regulations will have to do. As soon as the rule changes were announced it was a clear signal, 2014 it is. The big benefactors are all those that are renewing mortgages in the next 12 to 18 months. The time coincides perfectly with what can only be described as the halcyon days of our industry. All those five year mortgages taken out in 2006, 2007 and 2008, are coming up for renewal. There’s a good likelihood that the effective rate for the economic life of those mortgages, original term and renewal, is free money. I consider any rate less than 4% free money.
The BOC is predicting modest growth for 2013 and 2014, a clear sign that the global economy is at best, fragile. A number of Central Banks around the world recently cut their overnight lending rate in an attempt to stimulate their economy. No such indications of that happening here in Canada. What is happening in Canada is that investor sentiment is starting to wane. Manulife’s Investor Sentiment Index was down in the first half of 2012. The report suggested less enthusiasm for almost all types of investments, including fixed income securities, investment properties, balanced funds and cash. Sophisticated investors are weary and starting to sit on the sidelines. What happens when the uninitiated start to make purchasing decisions purely based on headlines? There might have to be an adjustment to the economic growth forecasts for 2013 and 2014.