It looks like our neighbours south of the border will get something “special” this holiday season; like an interest rate hike. After almost nine years the U.S Federal Reserve rate is about to be increased.  Chairwoman, Janet Yellen, has been itching to raise rates for a while now, and the latest economic data from the U.S. gives her an opportunity scratch that itch. A rate hike is a signal to Americans, and the global economy, that worst is behind them, and the need for government to stimulate the economy is in the rear view mirror.

Or is it? The U.S. November job report indicated that over 200k jobs were added to the work force, their dollar is soaring, the unemployment rate has been cut almost in half to where it stood in 2008, so what’s not to be giddy about? Well, there is data to support that consumer spending, housing starts, and job creation have flattened. So the question is what happens if their economy has flattened, while at the same time the overnight lending rate is going up? Some pundits are actually suggesting that raising the rates now gives the Fed some wiggle room if they have to lower rate, yet again, to stimulate the economy. It’s not as if this hasn’t happened before.  Like back in 1930′s, a rate hike, followed by a quick rate drop, all the while knee deep in the Great Depression. Yeah – that little historical nuisance.

So what does the Fed’s move to increase rates mean for us here in Canada? For the time being, not much. We normally walk in lockstep with the U.S. Fed, but we’re about to decouple from that standard practice, and continue on the path we are on today. The reality is that our economy is still too fragile to mimic the Fed’s move. The oil sector in this country has been hammered, and the fallout has been far reaching. Some are suggesting (more…)

You’ve heard it all before, Europe bad, China slowing and US crawling along.  With respect to Canada’s economy, the BOC is projecting a 2.1 percent growth this year, 2.3 percent next year a 2.4 per cent in 2014.

As a surprise to absolutely no one the Bank of Canada left the benchmark interest rate at 1% for the 25^th consecutive month.  Furthermore, BOC’s economic outlook for the next few years remains unchanged.  In other words not much has changed since the last announcement from the Bank of Canada.  Maybe there should only be announcement when there’s actually something to announce.  Given the repetitiveness of the announcements everyone is looking at language subtly for an indication that something might be different.  There was a twist or something new in this announcement in that the central bank will consider the state of household finances before increasing the target rate.

That’s interesting because the BOC expressed, yet again, their concern it has over household debt.  So if Canadians do not curb their insatiable appetite for debt (let’s be clear the debt refers to mortgages) the BOC may increase rates to curtail the said behaviour.  Is this simply a threat, and why now?  I think it’s rather apparent that market has slowed since the last changes to the mortgage rules in July, so was another shot across the bow necessary?  The answer appears to be yes.  The BOC also made it very clear that no cut to interest rates were being considered at this time.  There are things in life that don’t have to be said, and now “changes in BOC benchmark interest rates” falls into that category.

The BOC’s forecast for the Canadian and global economy is fairly consistent with their last statement.  You’ve heard it all before, Europe bad, China slowing and US crawling along.  With respect to Canada’s economy, the BOC is projecting a 2.1 percent growth this year, 2.3 percent next year a 2.4 per cent in 2014.  In other words no one should be planning a parade over the growth of our economy.  The BOC did indicate that “over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target.”  What monetary policy stimulus might be withdrawn?  It’s a cliffhanger, not as big as “who shot JR?” but a cliffhanger nevertheless (Those under 30 years of age, Google who’s JR Ewing).

The BOC announcement reminds me of what baseball legend Jogi Berra once said, “it’s like déjà vu all over again”.  A blog that I posted not long ago, Bank of Canada Still Locked With the US Fed, I opined that if you want to know what’s going to happen with our rates you don’t have to look any further than what the US Fed is doing. 

“The reverberations of QE3 will be felt here in Canada.  Bernanke has stated that the Fed is committed to leaving its target interest rate close to zero until 2015.  A few short months ago the prediction for a rate increase was 2014.  Clearly the Fed believes interest rates are too high in the US to encourage investment and mortgage borrowing.  I am not sure how enamored the Bank of Canada is with this decision.  Up until now the Bank of Canada has been in lock step with the US Fed.  Will they deviate from that?  I highly doubt it.  So, an overnight lending rate increase may have been pushed out for another 12 months in Canada.  That’s good news for consumers, especially for borrowers renewing their mortgages over the next 24 months.  The not so good news is that if you’re a first time home buyer, don’t expect the government to reverse the most recent changes to mortgage rules anytime soon”.

God, I hate being right.

Until next time,

Cheers.

Rolling the dice is perfectly acceptable when you’re in a casino in Las Vegas. I know from first-hand experience that playing “craps” in Vegas can be a rush. For those of you who may not be familiar with the rules or finer points of “craps”, and would like to give it a try next time you’re in Vegas, DO NOT ATTEMPT TO PLAY UNLESS YOU UNDERSTAND ALL RULES!  Now that you’ve rolled your eyes and are thinking thanks for enlightening me Bozic, the fact is many do play without understanding all the rules. Why? Because that’s where the action is and where all the noise is coming from. The noise draws you to the table, and when you get there you think I want some of this. You find yourself placing bets, not even understanding what your odd’s are. You might even start mimicking the bets being placed by other gamblers at the “craps” table. You look down at the table and you’ve got all your bets covered. Come on shooter, make this a magical role. Then you hear the most dreaded words at a “craps” table, seven out…seven out. For those uninitiated that means all your chips are gone! That’s when you start thinking if you only had played blackjack instead you could have played for much longer. But that’s gambling and it’s a part of the experience. That’s okay for Vegas but maybe not so much so when choosing between a fixed rate mortgage and an ARM.

The reality is that many borrowers are rolling the dice today. I’m setting aside those borrowers that can withstand the rate variances, and have the stomach to ride out an ARM for 60 months. I just wonder about borrowers who truly don’t understand the rules of the game. I wonder if some borrowers are placing mortgage bets based on what their neighbor or co-worker did with respect to their mortgages. Maybe borrowers are being influenced today by advertising. The 50/50 mortgage is getting a lot of airplay today, and that product was designed for those that wanted to play it safe or safer. Maybe it’s all about today and they’ll worry about tomorrow, whenever tomorrow comes. Maybe all of the above plays a part in the decision-making process but the biggest influence is the brokers personal bias.

All I know is that at some point in the not too distant future rates are going up. The warnings and predictions have been there for all to see for some time now. For example, Bank of Canada Governor Mark Carney recently said the following, “Low interest rates today do not necessarily mean low rates tomorrow,” warned Carney. “Risk reversals, when they happen, can be fierce; the greater the complacency, the more brutal the reckoning.” There’s no ambiguity there, and I’m thinking he might be one of those people “in the know”. The way I look at it any five year mortgage, under 4%, is free money. It’s also 60 months of peace of mind for the borrower. I can’t help but think if borrower’s get squeezed by a rate hike, and then they ask you how did this happen, irrespective of the facts all they will hear is, seven out…seven out.

Until next time

Cheers