With all the talk about the Bank of Canada wanting to raise rates, it is instructive to look at what the futures market is saying about the issue. It should be noted that the next scheduled rate announcements are as follows:
April 20, 2010
June 1, 2010
July 20, 2010
September 8, 2010
October 19, 2010
December 7, 2010
A rate increase on or before the July 20, 2010 meeting is a guarantee. The question is how much?
The markets currently say the following:
| Month / Strike | Bid Price | Ask Price | Settl. Price | Net Change | Vol. |
| + 10 AL 0.000 | 0.000 | 0.000 | 99.480 | 0.000 | 0 |
| + 10 MA 0.000 | 0.000 | 0.000 | 99.440 | 0.000 | 0 |
| + 10 JN 0.000 | 99.320 | 99.325 | 99.360 | -0.040 | 21736 |
| + 10 SE 0.000 | 98.870 | 98.880 | 98.910 | -0.040 | 33614 |
| + 10 DE 0.000 | 98.400 | 98.410 | 98.450 | -0.050 | 19923 |
| + 11 MR 0.000 | 97.980 | 97.990 | 98.030 | -0.040 | 6402 |
| + 11 JN 0.000 | 97.630 | 97.640 | 97.690 | -0.050 | 3215 |
| + 11 SE 0.000 | 97.320 | 97.350 | 97.410 | -0.080 | 1445 |
| + 11 DE 0.000 | 97.040 | 97.060 | 97.140 | -0.090 | 707 |
| + 12 MR 0.000 | 96.810 | 96.840 | 96.910 | -0.080 | 50 |
The three-month interest rate will be:
June 2010: 0.68%
September 2010: 1.13%
December 2010: 1.60%
March 2011: 2.01%
June 2011: 2.37%
Reading my tea leaves, this would suggest that the Bank of Canada will raise per the following schedule:
April 20, 2010 (No change – 0.25%)
June 1, 2010 (No change – 0.25%)
July 20, 2010 (+0.75% to 1.00%)
September 8, 2010 (+0.25% to 1.25%)
October 19, 2010 (+0.25% to 1.50%)
December 7, 2010 (+0.25% to 1.75%)
It is also likely that by June 2011 that interest rates will be around 2.5%.
The only effect these rate increases will have on mortgages are for floating rate mortgages (ING Direct offers them at prime minus 0.4%). This would mean that rates would go up from 1.85% to 3.35% by the end of the year and roughly to 4.1% by the middle of 2011. For most borrowers on floating rate mortgages, they will likely see their interest payments at least double over the course of the year. As an example, for somebody borrowing $300,000, their interest payments will increase from roughly $450/month to roughly $1000/month by the middle of 2011.
In terms of fixed rate mortgages, rates are essentially set by the bond market, and the bond market has already “baked” in these projected rate increases. The best available 5-year fixed rate mortgage is 3.69% currently. Given a choice between these two options, it is a rare time where taking the 5-year rate would be the prudent option.
It is likely once interest rates start to increase that banks will increase the “prime minus” spread from a typical 0.4% currently to around 0.8% – the peak discount which was seen in the last housing rush.
Either way, the lack of ultra-cheap credit will have an effect of slowing down the housing market considerably.