Tuesday, July 20, 2010

Time to Panic? Bank of Canada increases prime rate by a 1/4%.

Bank of Canada has just raised its prime lending rate for the second time this year and many customers who are on a variable rate mortgage are wondering whether it's time to lock in or continue as is.

This ¼ point increase is not a reason to panic and convert to a fixed term mortgage. Customers who are in variable rate mortgages have enjoyed historically low interest rates for the last twenty months and slight increases should not change their strategy moving forward.

I continue to recommend staying in a variable rate mortgage and using your excess cash flow to pay down non-tax deductable debt. My expectation is that the Bank of Canada will increase their prime lending rate once more in 2010 (either Sept 8th or Oct 19th) meaning that the banks will be at 3.00% and for anyone that has a prime minus variable rate mortgage, that would translate to a savings of over 1.5% vs today's 5 year fixed rate mortgage thus the savings is quite significant.

So what do other economists think???

Avery Shenfeld of CIBC World Markets, said the central bank would hike its benchmark rate to 1.25% (bank prime would then be 3.25%)before it pauses for "at least" two quarters, as relatively low borrowing costs will be required as the global economy grapples with widespread budget cutting and weakening consumer demand.

Economist Michael Gregory of BMO Economics, who also calls for a another 25 basis point increase, said he expects the bank to make one more increase of that size in September then hold the line for the remainder of the year.

Excerpt from The Bank of Canada website:

The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank's outlook in its April Monetary Policy Report (MPR). While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long term growth, it is expected to slow the global recovery over the projection horizon. In the United States, private demand is picking up but remains uneven.

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank's view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

Questions about your individual needs, please contact LILIANNE EID at TD BANK

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