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Why the Bank of Canada Won't Raise Rates Tomorrow

March 1, 2010 by Gordon McCallum

Mirror, mirror, on the wall! Who’s got the clearest crystal ball?

(I doubt it’s me, but here goes)

The Bank of Canada is not going to raise rates tomorrow. Not just because I say so. Or because the Financial Post says so , but for a few other key reasons:

1. The Bank of Canada said they wouldn’t

2. Our economy is recovering, but emotionally we’re far too scarred from the recession to handle a nasty surprise.

3. Canadian Bond Yields, which are market driven, haven’t gone up in anticipation of a move. They always go up in anticipation of a move – and then go back down again if they’re wrong. Bond traders don’t expect a surprise, so I don’t either.

Despite the fact that Canadian real GDP went up 5% last year and Prime Minister Harper sees encouraging economic signs , there is still plenty of risk to the recovery so raising rates too soon could be a cold shower just when things are starting to heat up.

If I’m wrong I’ll probably just delete this post and replace it with a different one. :)

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Some comments...

  • Without saying it out loud – Who benefits if mortgage rates rise. The financial news this past week were overjoyed to announce that your favoutite bank had just made huge profits. Nothing wrong with that but who is behind the push to fix your current mortgage rate because rates are going to rise. Increasing balance sheet profits is good for Canadian Banks but it is not necessarily good for the consumer who holds a mortgage. If you are feeling a little pushed to fix your rate – say you have a variable rate at 2% and the bank is offering you a fixed rate at 4%. Try this – do not fix your rate but take the difference in cash and put it into a daily interest savings account in the format of a NO FEE TFSA. On a 300000.00 mortgage that is $6000.00 in the first year. Some daily interest No Fee TFSA savings accounts are paying 3%. Your cash is liquid if you need it to pay down or subsidize your mortgage payments and if rates do not rise by the end of the year you have built up a nice nest egg. In any event you will have control of your money and will not have paid extra interest. If you were going to fix your mortgage rate anyway you have nothing to lose and everything to gain.Financial Planning Pays!

    Jim Kew (March 11, 2010)

  • Great post Jim and thanks for the comments. I couldn’t agree with you more. In fact, the biggest benefit of a variable or adjustable rate mortgage is when you do something with the savings. Whether it’s investing it, as you suggest, or putting the savings against your principal, anything is better than paying the lender more in interest than you need to.

    A fixed rate is in most cases a pretty expensive insurance policy against higher rates in the future. For some people they make great sense, but for others who can weather the ups and downs, there are more optimal strategies, as you say.

    Gord McCallum (March 11, 2010)

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