Not too long ago, the Bank of Canada raised the benchmark overnight rate by 0.25%. The ongoing sentiment at that time was that the Canadian economy was starting to heat up, and interest rates were about to start their long upward climb. People rushed to get into 5-year fixed mortgages, notwithstanding the fact that even in an environment of climbing interest rates, variable-rate mortgages can still be advantageous.
Now, with the recent shocks in Europe and elsewhere, there is a lot of uncertainty as to where rates are going next. Will Mark Carney raise rates again, when it could turn out to be premature? We could very well be headed for a decline in economic growth for the next half of the year, which would lessen the pressure for interest rates to rise.
Items to consider
If you are looking to buy a home or refinance an existing property, then the interest rate is going to have a great impact on you. If you are in a lot of debt and some of that debt is tied to the prime rate, then you definitely want to know where rates are going.
First, consider that interest rates are still very low, by historical standards. Second, consider the propensity of governments everywhere to use inflation as a tool to prevent deflation and to keep spending up. Inflation eventually leads to pressure for higher interest rates. Finally, consider that if money stays too cheap for too long, it increases the propensity for another bubble to be formed. Policy makers are going to want to avoid that situation happening.
Taking all things into consideration, one should at least be prepared for a rise in interest rates in the months and years to come. Your financial future could depend on it.
So, reader, where do you believe interest rates are headed? Are you prepared for a rise in rates? Please don’t hesitate to share your thoughts and let me know what you think in the comments!
Further reading
- Fixed Rate and Variable Rate Mortgages: Which is Better?
- Interest Rate Mania: Where is the Housing Market Going?
- Canadian Mortgage Trends: Analyzing Variable & Fixed Mortgage Costs
- Daily Capitalist: How To Start An Economic Recovery
- Canadian Finance Blog: Low Interest Rates: The Good, the Bad and the Ugly
Interest rates are a tough call. I’m convinced that within the next several years we will see them much higher but right now, in the U.S., there seems to be a number of factors holding them down. First, individuals are piling into bonds. Second, U.S. Treasuries are seen as a safe haven from the volatility seen in the capital markets. Third inflation is low and there are no immediate signs that it will go higher.
Some bloggers are pointing out that there is a demographic dynamic whereby aging populations are reducing stock exposure and increasing the committment to the bond sector.
One thing that has me a bit nervous is the excess reserve position in U.S. banks and the fact that banks are earning almost zero percent when they could buy Treasuries and get over 2% – albeit with a bit of interest rate risk. If banks give up totally on loans and decide to put the excess reserves into Treasury short term notes it will push rates lower – especially at the short end.
This of course is all on the demand side. On the supply side is where we see the forces pushing rates higher. Here we have an unprecedented fiscal mess which will require the issuanve of bonds to the extent never before seen. In fact, the possibility of reinforcing upward pressures exists. As rates rise ever more bonds will have to be issued to meet the ever increasing interest expense on the debt which is already very high.
So I guess at this juncture I expect rates to stay fairly low for a while but to head higher later.
we’ve just had our sixth consecutive rate rise in Australia. Average mortgage rate is now at 7.35%. From my reading you guys in Canada are in a fairly similar position, little government debt, strong resources sector, in fact if it wasn’t for the snow and the lack of sweet beaches we’d practically be identical. Interest rates are headed up. They’ll need to head up to move to prevent asset bubbles
I think the Bank of Canada will increase the rate this July. It’s mostly a gut feel surrounding positive comments and reports about the Canadian economy. Australia has been raising them. They raised 3 times by a quarter point earlier in the year. Some countries are doing it. It’s not a reason to do it, but I am sure other countries are looking at what impact it had.
I am ready for it. Bring it on. Although lower is better …
I think it’s going up 0.25 in July. Many media reports indicate that. Like Passive, I too, am OK with that.
Rates need to be “normal” again for many reasons; most notably, if consumer debt doesn’t start being curtailed, the economy as a whole will suffer. More debt piled upon more debt. How is that sustainable? On the mortgage front, people should get used to paying 5-6% mortgage interest; if anything, that’s historcally below average.
The above said, my wife and I are considering buying a house next year, selling our current one. Ideally, it would be good to sell and move this fall; take advantage of cheap money, but we have too much on the go and fall plans already that we don’t want to break. I think by spring or summer 2011, we’ll be at least 0.50 basis points higher. It might cost us a bit more money next year to buy a house, but we’ll also have another year to build more home equity. I guess it’s a tradeoff…
Hi Kevin, Definitely rates are going up!! They are at historical lows and have no where else to go! The bigger question is:WHEN. & I have no answer to the WHEN question. I like the discussion! Best regards, Barb
Well, looks like rates in Canada just went up another 0.25%! Thanks for all of your comments.
They can really only go up – so get ready! When is the big question…it should be an interesting few years here in the U.S.!