17 Mar

Odds of another Bank of Canada rate cut rise as oil and jobs outlook dims


Posted by: Brad Lockey

For David Watt, the Bank of Canada missed a chance to fortify the economy against the collapse of oil prices when it refrained from cutting interest rates this month. They’ll make up for it next month, he says, and he’s not alone.

Governor Stephen Poloz, who unexpectedly cut rates in January, will ease again by mid-year, according to the median estimate of a Bloomberg survey of economists conducted March 6 to March 11. Watt, chief economist at the Canadian unit of HSBC Holdings Plc. and among the most bearish Canadian forecasters, expects a 25 basis-point cut next month to 0.5%, and another in May. That would put borrowing costs at the lowest since 2010.

“The realization will be, we should have done what we can to backstop business confidence when we had an earlier opportunity,” Watt said. “You just get another month where businesses get somewhat more cautious and business investment plans get delayed further.”

The Bank of Canada left rates at 0.75% March 4, saying it was waiting to assess the impact of the January cut, which it called insurance against the decline in prices for oil, the country’s largest export. Since then, crude has resumed a drop to an almost six-year low, and data from February showed the decline is already costing the country jobs.

Dollar Decline

“The Bank of Canada needs to take out more insurance,” Watt said by phone Friday from Toronto.
The market is starting to agree with him. The probability for a rate cut on April 15 increased to 35% on Friday from 25% at the start of the week as oil fell and the country reported 1,000 jobs lost nationwide in February. The Canadian dollar fell to an almost six-year low of C$1.2824 per U.S. dollar.

The central bank has said it’s counting on exports and business investment to take over from debt consumers as Canada’s main economic driver, and Friday’s jobs numbers suggest that isn’t happening, even with the currency’s 20% decline over two years and a strengthening U.S. economy.

By industry, the biggest job losses nationally were the 19,900 in manufacturing, followed by the natural resource sector. Alberta, home to the bulk of Canada’s oil production, posted a 14,000 decline in employment.

Split Outlook

“You’d hope over time the currency’s depreciation would boost manufacturing,” Emanuella Enenajor, senior Canada economist at Bank of America Merrill Lynch, by phone from New York. “We’re seeing it in activity, we’re not seeing it in hiring.”

Enenajor is one of 10 other economists surveyed expecting another rate cut, while seven others see no cut. Until January, economists had only disagreed on how long the Bank of Canada would wait to start raising rates back to pre-crisis levels, not whether it would raise rates at all.

Odds the Bank of Canada would cut again had climbed to as high as 80%, according to trading in overnight index swaps, before Poloz changed the tone of his remarks Feb. 24, saying in London, Ontario, that the January easing buys time.

The yield on Sept. 15 banker’s acceptances, a gauge of short-term interest rate expectations, ended the week five basis points lower at 0.85%. They touched a low of 0.67% on Feb. 20.

“I have some reservations around a second-quarter rebound. It’s going to take more time for growth to rebound,” Thomas Costerg, an economist at Standard Chartered Bank, said by phone from New York Friday.

Like HSBC’s Watt, Costerg sees two more rate cuts needed to revive a flagging economy. He predicts one in April and one in July.

“There was almost no growth in private-sector jobs,” Costerg said following the jobs report. “The January surprise rate cut was driven by the oil drop. The April cut will be driven by deterioration in the data.”


12 Mar

Are variable mortgages worth it if lenders don’t follow the Bank of Canada?


Posted by: Brad Lockey

People choose variable-rate mortgages in hopes that rates will drop, or at least stay flat. For every time the Bank of Canada cuts its key interest rate one-quarter of a percentage point, those with variables save about $245 a year on every $100,000 of mortgage.

But what happens when the central bank lowers rates and the nation’s lenders don’t pass on the full savings? That was the case in January when, for the first time on record, major banks all failed to match a one-quarter percentage point rate cut by the Bank of Canada.

It was a rude awakening for millions of variable-rate borrowers who thought that lenders had to follow the central bank’s lead. But has it made variable-rate mortgages less attractive to mortgage shoppers?

The fact is, the central bank’s rate cuts are little more than strong encouragement for financial institutions to lower their prime rates. What lenders actually do is entirely their call. Each lender sets its own prime rate based on short-term funding costs and competitive pressures. Most lenders used January’s rate cut as an opportunity to boost their bottom lines.

A few lenders, however, put customers first. They followed the central bank’s lead and passed along the full 0.25-point cut. Summerland Credit Union is one such lender. Unlike the major banks, who made us wait six long days for their decision to cut by a smaller 0.15 percentage points to 2.85 per cent, Summerland chopped its prime rates to 2.75 per cent within 48 hours of the central bank’s cut. That’s despite having less access than the banks to low-cost mortgage costs.

But credit unions aren’t always competitive. Despite the benchmark prime rate – as tracked by the Bank of Canada – being 2.85 per cent, some credit unions are still advertising rates as high as 4.25 per cent.

Their variable-rate discounts can occasionally be deceiving as well. I remember one Ontario credit union in 2008 that advertised variable rates which were one-half a percentage point lower than the major banks. Unfortunately, borrowers who jumped on that “special” rate were outraged when this credit union refused to drop its prime rate like other lenders in 2009.

And then there was that other case in 2008 when banks pocketed one-quarter of a point out of a three-quarter-point central bank rate cut.

As you’re likely surmising, one cannot assume that variable mortgage rates will track the central bank’s overnight rate. Banks virtually always raise variable rates after a central bank rate hike, but borrowers have to hope they’ll get the full benefit when the central bank cuts.

For some, this takes the lustre off of floating rates. While interest in variable-rate mortgages surged after January’s surprise rate cut, it would have been significantly greater had prime fallen 0.25 percentage points instead of 0.15.