 |
|
|
|
Interest rate update July 28, 2006
Two weeks ago, the Bank of Canada bucked the trend it had set during the
fist half of this year which featured seven consecutive increases in the
overnight rate, with the most recent increase to 4.25% taking effect in late
May. This last increase sent the Prime Rate to 6.00%. The Bank left the rate
unchanged as it determined that the current rate was sufficient to hold
inflation within the target range of 2% annually as the outlook for economic
growth and inflation has not changed materially from the Bank's last update
in April, 2006.
In its analysis, the Bank judged that the Canadian economy continues to
perform slightly above its production capacity. This would usually signal
the need for more rate tightening in order to hold inflation in check, but
the Bank anticipated medium term weakness in US consumer consumption and
further depreciation of the US dollar. This forecast, together with the
lagged effects of a higher Canadian dollar, lead the bank to hold firm on
its overnight rate.
What does this mean for the Canadian mortgage market? Have we reached the
end of increases in the Prime Rate for now? The answer of course is:
perhaps and perhaps not. What we can conclude, however, is that the recent
decision and commentary from the Bank may renew consumer demand for variable
rate, Prime based mortgage products. When Prime Rate reached 6.00%, the
spread between the five year fixed mortgage rate and variable rate mortgages
reached its lowest point in more than five years. The reduction in
significant interest savings from the increases in the Prime rate during the
first half of this year lead many consumers to choose the security of a
fixed rate over the uncertainty of a variable rate in their mortgage product
selection. With the Bank of Canada holding steady on the overnight rate and
with most Canadian investment dealers predicting no further bank rate
increases for the remainder of this year, consumer preference may shift back
to Prime based, variable rate mortgage products.
Please contact your mortgage broker Brent Irving at (604) 764 6336
|
|
|
