The Bank of Canada (B.O.C.) raised its key policy rate 25 bps to 0.75%, as was expected. This will mean an increase in variable rate mortgage rates by the same amount. In a statement released, The B.O.C. echoed its previous sentiments:

“Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

The B.O.C. is still concerned with how the economy south of the border will perform in the coming months and years and the impact that this will have on Canada. We believe that this will make The B.O.C. cautious when it comes to increasing rates in Canada.

It seems as though the market is not sure whether the word’s economy is about to boom out of the economic blues or sink further into a crisis of sovereign debt issues and lack luster consumer demand. While this continues to see saw back and forth we continue to advise our clients to stay in their variable rate mortgage products. Fixed rates have continued to decline and further reductions were seen just after The B.O.C.’s rate announcement.

We believe that the decrease in fixed rates can be attributed to some of the language in The B.O.C.’s statement and the overall performance of the world’s economy as of late.

Another point worth mentioning is that The B.O.C. downgraded its GDP projection a couple tenths, to 3.5% and 2.9% in 2010 and 2011, respectively, from 3.7% and 3.1%, respectively, in April’s correspondence. This is a meaningful change, because The B.O.C. now has more time to return interest rates to more normal levels. Interestingly, The B.O.C. kept its prior core inflation call: it’s “expected to remain near 2 per cent throughout the projection period.” This is important because The B.O.C.’s goal is to keep inflation at 2%, the monetary policy rate that impacts the prime rate that we see is increased or decreased in an attempt to keep inflation at 2%.

In the interests of keeping this newsletter short what we should gather from The B.O.C.’s decision and commentary is that they will be a little more cautious to raise rates in the coming months. Although we know that rates are going to increase they will not be jumping up in the fashion that was called for by economists in the past months.

Another point worth noting is that those same economists have lowered the odds of a September 6th follow-up rate hike to 45%, from 65% before the announcement.

Finally a quick plug for our services:

In these times of economic fluctuation it is more important than ever to have someone looking after your mortgage. When making your next decision please keep in mind that your lender is and always will be looking after their bottom line and you should be doing the same. Treat your debt the same way you treat your investments and enlist a trusted professional. It may not be us, but it should be someone you trust and whose opinion you value.

Marcus Tzaferis