On July 20, the Bank of Canada is very likely to increase the overnight target interest rate from 0.50% to 0.75%; this has already been baked into the marketplace. The Prime Rate is likely to correspondingly increase from 2.5% to 2.75%.
In terms of what lies ahead in the future, we look at the only financial product in Canada that one can use to predict such rate changes, the 3-month Bankers’ Acceptance Futures:
| Month / Strike | Bid Price | Ask Price | Settl. Price | Net Change | Vol. |
| + 10 JL | 0.000 | 0.000 | 99.045 | 0.030 | 0 |
| + 10 AU | 0.000 | 0.000 | 98.960 | 0.030 | 0 |
| + 10 SE | 98.875 | 98.880 | 98.880 | -0.005 | 10612 |
| + 10 DE | 98.700 | 98.710 | 98.710 | -0.010 | 20474 |
| + 11 MR | 98.540 | 98.550 | 98.540 | 0.000 | 17714 |
| + 11 JN | 98.350 | 98.360 | 98.360 | 0.000 | 10038 |
| + 11 SE | 98.140 | 98.150 | 98.140 | 0.080 | 2281 |
| + 11 DE | 97.890 | 98.110 | 97.890 | 0.080 | 209 |
| + 12 MR | 97.580 | 97.700 | 97.680 | 0.000 | 341 |
| + 12 JN | 97.370 | 97.490 | 97.430 | 0.090 | 0 |
What we see is a 3-month future rate of 1.12% in September; and by years’ end we have a 1.29% rate.
There are four more meetings left in 2010; July 20, September 8, October 19 and December 7. Right now, the market is speculating that there will be 0.25% increases in two of these meetings, leading to a year-end target rate of 1.00%. It is possible that after September 8, that the Bank of Canada will leave short term rates unchanged for the duration of the year.
In 2011, the market believes that the short term rate will increase by about 0.75% above this; to 1.75%, still a very low rate by historical standards.
Presumably after its July20 statement it will change the language which will sufficiently guide the marketplace to adjust its prices.
Of note is the impact on mortgage rates; only variable-rate mortgages will be going up as a result of these short-term rate increases. The reason is because longer-term rates are set by the marketplace, and these have gone down over the past quarter. A 5-year government bond yields 2.49% currently; this was as high as 3.2% back in April.