BoC interest rate change: A surprise?

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For the first time in over four years the Bank of Canada has changed its target for the overnight rate, which may come as a surprise to brokers.

“The Bank of Canada today announced that it is lowering 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 BoC wrote in an official release. “This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.”

The rate change likely drive clients to variable rate mortgages over fixed.

And while the drop is due, in large part, to a plummeting energy sector, the central bank remains optimistic about other industries. But for how long?

“The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters,” the bank writes. “Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth.

“However, there is considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices. Business investment in the energy-producing sector will decline,” it continues. “Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth.”

The news follows a number of predictions near the end of 2014 that the Bank of Canada would eventually hike the rate in the coming years, which is now looking less likely.

In September, TD Bank predicted the short term rate will hit 2 per cent by the end of 2016.
  • J G on 2015-01-21 1:09:19 PM

    This just goes to show - nobody has a Crystal Ball in their pocket.

  • @kiltedbroker on 2015-01-21 1:12:54 PM

    What a great opportunity for brokers to connect with their current client databases, share information with social networks, provide content to Realtors to distribute to their networks, and to make themselves available to local media outlets to provide commentary.

    Looking for a marketing action plan, try this:

    1. Write a summary blog post on your own website.
    2. Share that post socially.
    3. Draft an email newsletter and send to your existing client database with a link to the post you wrote on your own blog.
    4. Email or phone local media outlets and offer yourself as someone who can provide insight on these recent changes.

    This is an incredible opportunity for brokers to demonstrate their knowledge to the public. Take advantage of it!

  • Mike on 2015-01-21 1:20:56 PM

    Why is this a surprise? It was right here a week ago that we asked why your poll did not have the option of a BoC rate drop. It was firmly predicted by myself and I believe others that we would see a drop. Your comments saying that this will drive people to variable rates may not make sense. If long term rates drop of further this may be the optimum time to lock in. Perhaps 2.69%?? Ontario's economy will benefit from this and we could see a half to three quarter increase in rates into mid to late 2016 as the housing heat up will continue to swell everywhere but Alberta.

  • Arnod Molder on 2015-01-21 1:27:34 PM

    Innovative and a case of fishing up-stream.

  • Jeff on 2015-01-21 1:29:49 PM

    GoC Bond yields are falling across the board today in reaction to the decision, so fixed rates will likely fall further as well.

  • B D on 2015-01-21 2:13:15 PM

    Why is this big surprise? Because as recent as last week the big 5 have predicted rate increases and you can't scare someone into locking in when rates are falling. I predict new low rate promotions from BMO next week.

  • Dominc on 2015-01-21 2:58:39 PM

    Buyer beware: The bubble prices may perhaps reach 70% in spring market from announced 63% by Deutchebank.

  • Jennifer on 2015-01-21 3:09:17 PM

    This does not necessairly mean that because the BoC rate went down it will drive more borrowers to variable as Prime may not move. BoC and Prime don't always have to move hand in hand.

  • John Van Driel on 2015-01-21 3:44:43 PM

    Let's take a deep breath and wait. Remember, Mr. Harper may also call an election ANY DAY NOW!!!!

  • Angela Wong-Liao - Invis on 2015-01-21 3:50:10 PM

    I believe 2015 will be an interesting and volatile year with many unexpected changes. The best strategy at this time is to wait and see what evolves, federal election, oil prices, Canadian dollar, unemployment rate, and more.

  • Omer Quenneville on 2015-01-21 4:14:01 PM

    I seem to have that crystal ball. My clients have been taking variable for over 10 years. They win again... but don't forget.. rates will rise... and one day they will and guess what, variable will still be the best choice.

  • J G on 2015-01-21 4:20:36 PM

    Omer - that's not what I meant by my comment and yes, variable wins out historically.

  • Jeremy on 2015-01-21 4:41:35 PM

    This cut didn't surprise me, but then again I've been following the markets for some time. I stated in a previous post that BOC would cut and Prime would remain at 3%.

    I hear many taking about variable being the best choice...correction, adjustable is the best choice...there is a difference.

  • Arnod Molder on 2015-01-21 4:43:08 PM

    My comment is misplaced. It has nothing to do with the BoC news.
    My comment was in regards to your new marketing tool where borrowers can pre-qualify and referred to a broker.

  • Arbitrage on 2015-01-21 5:13:45 PM

    Hi Jeremy. I'm interested in hearing more about why you think the banks won't pass along the 0.25% cut. It's my understanding that they normally do but I also know they have the discretion not to and have exercised it in the past. What are your thoughts on this? Would this create a huge revolt among the public? Would it matter? What reasoning would the banks have to withhold it being as profitable as they are? Love to hear your (or anyone else's) thoughts on this.

  • Arbitrage on 2015-01-21 5:27:07 PM

    EDIT: Just saw an article that said TD doesn't plan to follow rate cut. Interesting

  • 'The' Rob Campbell on 2015-01-21 5:31:37 PM

    We may have predicted this on Canadian Mortgage Hangout. Yes, it was in January of 2014, but can we get a "Booya!" anyway?

  • @kiltedbroker on 2015-01-21 5:34:51 PM

    Aha the Rob. Well played sir. I predicted prime up .25% in Q4 2014 with fixed rates snuggled up under 4%. You said prime drop. You win the internets for the day.

  • Ron Butler on 2015-01-21 6:31:49 PM

    TD's response is interesting, BOC says "we need to step in and protect the economy" TDCT CEO says "screw the economy, to heck with the public, we need more gross profit" Funny how it's always TD, Ed Clark was the first off the mark and said the same thing in 2008 the last time the bank's balked at following the BOC lead. They all changed eventually but it took a while.

  • Steve on 2015-01-21 6:48:43 PM

    I think BD is correct to say that BMO will be the first to announce the rate drop. But, banks may choose to profit take while the bean counters decide what to pay for interest on the various bank and GIC accounts.
    I was not surprised by the drop, but expected it early summer. A drop now means the economy was about to come to a screeching halt. and that is a bit alarming

  • Jeremy on 2015-01-21 7:11:44 PM

    Banks won't match today's BOC cut, why would they? Consumers have no problem spending and the last thing the economy needs is more indebtedness. The Finance Minister has had a conversation with bank exec's, not to worry. This cut has more to do with business than it does the consumer.

    Be careful what you wish for.

  • Steve on 2015-01-21 7:16:52 PM

    It only takes 1 bank to move, then they all have to move.
    As for debt, a guy with no job is still a guy with no job. Debt is a side issue if your tax base disappears and employers dry up. Government is stimulating business, who, by and large borrow with prime being important to the interest on the loan... as opposed to most house mortgages which are fixed.
    Interest rate drop doesn't change credit card interest costs, interest rate on many vehicle loans etc.

  • Ron Butler on 2015-01-21 7:17:32 PM

    Jeremy, I am not too sure, this was a HUGE story today, I am sure a few hundred thousand people will be calling their bankers this week asking when the change will show up on their statements.

  • Jeremy on 2015-01-21 7:35:45 PM

    Steve and Ron, I agree with you both 100%. Prime rate aside, did you see bond yields fall off a cliff after the announcement? Yikes! We should see fixed rates fall too, but we won't.

  • Ron Butler on 2015-01-21 7:47:43 PM

    Fixed rates will move down, but not much, not as much as an 0.87 yield would theoretically dictate. I think we will 2.69% or 2.59% as a "regular" rate soon.

  • Jennifer on 2015-01-22 10:40:50 AM

    I do not believe fixed rates will be moving down, the uncertainty in the investor market is to large due to these drastic movements of the GOC.

    A stable market is always better then this uncertain market.

  • 'The' Rob Campbell on 2015-01-22 11:56:39 AM

    I think Ron is bang on, actually.
    As I called a decrease in Prime back in 2014 *cough cough*, here's what I'm thinking:

    > Prime will decrease yet again in 2015 (after it does so in the coming weeks) to 2.5%.

    > Discounts on the Variable will start the decrease to P-50 or thereabouts do to the long term forecast of Prime not going back up. Lender's need to keep shareholders happy, hence the increase to P-50 from P-80.

    > Fixed rates will come down like Mr. Butler has said...that 2.69% paying full comp range sounds about right.

    Blast that database, folks. Its on top of everyones mind right now.

    The Rob

  • James Shinners on 2015-01-26 7:08:43 PM

    Does anybody have any suggestions on how we can get our broker lenders to make the first move? This is a fantastic opportunity for our lenders to differentiate themselves from the big banks and further help brokers' efforts to gain market share.

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