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October 2004

• Interest rate trends
• To Fix or to Float - the debate rages on 
• In the news

Interest Rate Trends

Fixed interest rates up slightly in September. 

The Bank of Canada increased their overnight rate by 1/4% percent to 2.25% in September 8, 2004.  This was the first change in the overnight rate since April 2004.  Most analyst predicted this move due to higher inflation numbers.  Most analyst predict another 1/4% increase on Oct 18, when the Bank of Canada reviews their overnight rate.

Core inflation rate remained essentially the same at 2.3% in July (vs. 2.5% in July 2004).   The rate of inflation is an important determinant of interest rates. 

Prime @ 4.0%

Term	Aug 13	Aug 20	Aug 27	Sep 3	Sep 10	Sep 17	Sep 24
3 year	4.50%	4.50%	4.50%	4.50%	4.50%	4.70%	4.70%
5 year	5.00%	5.05%	5.05%	5.05%	5.05%	5.10%	5.10%
10 year	5.75%	5.75%	5.85%	5.85%	5.85%	5.85%	5.85%

Table shows the best discounted residential mortgage rates for 3, 5 and 10 yr closed fixed rate mortgages

For a longer term view, click here to see the 3, 5 & 10 year best residential rate since September 2003 (updated monthly)

Click to view other relevant graphs

 

1) Graph of 5 year residential mortgage rate and prime rate since 1951

2) Graph of 5 year posted rate since January 2000

3) Graph comparing the 5 year mortgage rate versus variable at prime - 0.75%

To Fix or to Float - the debate rages on

With the prime rate rising to 4% in September, has the argument supporting a variable rate mortgage changed?  Invis, Canada's largest independent mortgage brokerage house, thinks not. 

Many economists see the increase in the Bank of Canada's overnight rate as the start of a "tightening cycle".  This is when the Bank of Canada tightens monetary conditions to slow inflation.

Invis researchers examined all the tightening cycles over the last 20 years to see how mortgage holders should respond to this tightening cycle.  The study found that the average tightening cycle resulted in an increase of 2.13% over an average tightening period of 7 months.  The researchers compared the 5 year variable rate mortgage against the 5 year fixed term mortgage, the two most popular mortgage options in Canada, and found that holders of variable rate mortgages will likely be better off than those who hold a fixed rate mortgage.  Click here to read more.

In the News (excerpts from recent press releases)

1) Bank of Canada increased target rate (Sept 8, 2004)  - The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 2 1/4 per cent. The operating band for the overnight rate is correspondingly increased, and the Bank Rate is now 2 1/2 per cent. read the full article.

2) Canada Inflation Slows, Prompts Rate-Hike Doubts  (Reuters, Sept 17, 2004) - Canadian year-on-year inflation slowed to a lower-than-expected 1.9 percent last month as the rise in energy prices eased, raising doubts about how fast the Bank of Canada will keep on raising interest rates. Click here to read more.

3) CIBC World Markets August Report (CIBC World Markets, Aug 6, 2004) - Here are the highlights of CIBC's monthly report: (1) Bank of Canada & Prime to go up 25 bps in September; (2) Bond Market rally due to market rethinking the extent & speed of monetary tightening in both Canada and the US; (3) We've seen bond yields drop and fixed rates drop over the past few weeks; (4) Chartered Bank Prime predicted to go to 4.50% by Dec 2005; (5) Inflation (core) predicted to be 1.8% in 2005 versus a Bank of Canada target rate of 2%; (6) Further evidence that we will see a rise in rates, but not quickly and not by too much; and (7) Stable cdn Dollar at between 75 and 77 cents over the next 15 months.  Click here to read more.

4) Dealers See Bank of Canada Rate Hike in October (Reuters, Sept 21, 2004) - All of Canada's primary bond dealers expect the Bank of Canada will raise interest rates at its Oct. 19 meeting, amid signs the central bank still sees inflation as a threat despite a lower than expected consumer price index in August.  Click here to read more.