Wait a minute. Weren’t rates supposed to go up this year?

If it wasn’t embarrassing enough to be a rate forecaster before, it is now. Today’s surprise Bank of Canada rate cut proves for the umpteenth time that “experts’” long-term rate predictions are not only futile, but potentially costly.

Here are 5 things to know about the Bank of Canada’s policy move:

• They really had to cut rates. Or did they?
  
  • Pundits are already debating whether the BoC jumped the gun today. The Bank said its rate reduction acts as “insurance” for the economy, given the shock of plunging oil prices.
  • But the BoC’s move comes despite its own expectations that core inflation (its key indicator) will settle at around 1.9-2.0%, both this quarter and this year—almost precisely on target. Moreover, we have a plunging loonie to consider (which could be inflationary) and lower rates (which will stoke a housing market that’s already near the boiling point in our two biggest cities).
• There are likely more cuts to come
  
  • In his press conference today, Governor Poloz said the Bank has the ability to “take out more insurance,” meaning further rate cuts. Financial markets are now pricing in roughly a 40-50% chance of another cut this spring.
  • Since the dawn of modern monetary policy, however, the Bank of Canada has never lowered the overnight target rate just once. If history is a guide, we could see another ¼-point reduction in the next few meetings. Barring that we’ll at least have an extended stretch at 0.75%.
• Lower funding costs will bring lower mortgage rates but…
  
  • There’s a big “but.” Lenders will pocket some of the improving spread, so we won’t see 5-year fixed mortgage rates match the drop in the 5-year government bond yield, at least not “beep for beep.”
  • While it is expected, banks have not yet announced any cuts to prime rate. It’s unlikely but there is precedent for them not to pass along a BoC rate cut. The spread between prime and the overnight rate was 175 bps in November 2008, but then grew to 200 bps in December 2008 where it has stayed ever since (until today).
  • We’re also waiting to see if the posted 5-year fixed rate drops. If so, it will become easier for people to qualify for a variable-rate mortgage (as well as 1- to 4-year fixed terms).
• The odds of new mortgage rules in 2015 just went up
  
  • The Bank of Canada acknowledges that household imbalances (the debt-to-income ratio) will likely get worse, but it says the oil price shock could lead to income and employment losses that make the housing market even more imbalanced. Ottawa’s only answer may be to tighten mortgage restrictions further.
• Don’t forget the penalties
  
  • If falling rates have you licking your chops about refinance opportunities, don’t forget that lenders have a little thing called “prepayment charges.” If you want to refinance to a lower rate and you’re in a big bank fixed-rate mortgage, the penalty and closing costs could easily offset most or all of your refi savings.

The next BoC rate meeting is March 4. If we get another rate cut then, it could make for a piping-hot spring housing market—possibly too hot for regulators’ liking.

Canadian Mortgage Trends

 January 21, 2015   Robert McLister   42 

Something to Think About…..

We have all heard how the Canadian Government has mandated changes to our Mortgage guidelines and they continue to imply there may be further changes down the road.  Over and over we hear cautionary tales of potential Housing Bubbles and how the Government must take precautionary measures or else risk having a potential financial collapse similar to the U.S. and other Countries.  Interesting to note that if you dig just a little bit their seems to be a completely contradictory theme of profit for the 5 Big Canadian banks that not only does not infer an imminent collapse of our Canadian Banking Institutions but makes you wonder what is going on. 

FACT:   “Moody’s Investors Service Inc. recently downgraded the credit ratings of several of the country’s largest banks, saying that high housing prices and record levels of consumer debt have left them vulnerable to a slowing Canadian economy”

 Reported by The Globe and Mail, January 29^th 2013.

Among other moves, the bond-rating agency took away Toronto-Dominion Bank’s triple-A rating. TD, which was the last Canadian bank to enjoy the highest-possible rating until January 29^th 2013, was downgraded over concerns about the increasing size of its U.S. operations, where the bank faces more competition than in Canada

Moody’s also lowered the ratings of five other financial institutions by one notch: Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, and Caisse Centrale Desjardins.

 The downgrades by Moody’s were not a major surprise after competing agencies began downgrading Canadian banks over the past year, starting with Royal Bank of Canada in June, owing to worries about slowing growth in the banking sector, and persistent low interest rates that are crimping revenue.

Full Article can be read here: http://www.theglobeandmail.com/globe-investor/moodys-knocks-canadian-banks-down-a-notch/article7910438/?service=mobile

FACT:  “It’s been a surprisingly good week for shareholders of Canada’s five biggest banks”

Reported by CBC News, On August 30^th 2012

All reported higher third-quarter profits — up 45 per cent from the same quarter last year — as they collectively reported net income of $7.8 billion. The profits were so healthy that they all soared past estimates from analysts – number crunchers who do nothing but follow the sector.

A good week, too, because all five also boosted their quarterly dividends. In BMO’s case, it was the first dividend boost in five years. People who follow the banking industry were trying to remember the last time all five boosted dividends at the same time.

The surprise in all the bank earnings announcements this week comes from the unexpected juxtaposition of surging profits and boosted dividends at a time when the entire banking industry is supposed to be facing a “tough operating environment,” as TD’s chief executive Ed Clark put it.

Banks supposedly don’t like rock-bottom interest rates. Too hard to make money. They don’t like it when consumers start to scale back their demands for credit, which they appear to be. We’re starting to see signs of a cooling housing market, where Canada’s banks hold millions of mortgages. Margins in some cases have been shrinking. The growth in the economy can best be described as modest. They all have exposure to the U.S. market, where conditions remain challenging.

Confidence amid caution

Yet here we have banks boosting dividend payouts – a vote of confidence that the banks don’t expect that a weakening economy will seriously derail their business models. After all, banks are loath to cut their dividends. None of the big five banks has cut a dividend since the Second World War.”

Full Article Can Be Read Here:  http://www.cbc.ca/news/business/story/2012/08/30/banks-profits-dividends.html

FACT: Royal Bank reports record annual profit of $7.5 billion

The Royal Bank says it had a record annual profit in 2012, including $1.9 billion of net earnings in the fourth quarter.

Full Article Can Be Found Here: http://www.thestar.com/business/2012/11/29/royal_bank_reports_record_annual_profit_of_75_billion.html