*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[The Fonz]

Originally Posted by Cecil Terwilliger

People seem to be confusing terms. Prime is set by each FI individually. As the BoC rate goes up, so too do most FIs raise their prime rate because it costs them more to borrow money.

Prime is usually the same at all FIs but can be slightly different from time to time. Not usually longer than a day, as they all tend to mirror changes.

Correct, and CIBC Prime rose today from 3.95% to 4.70%.

[Shazam]

Originally Posted by Cecil Terwilliger

People seem to be confusing terms. Prime is set by each FI individually. As the BoC rate goes up, so too do most FIs raise their prime rate because it costs them more to borrow money.

Prime is usually the same at all FIs but can be slightly different from time to time. Not usually longer than a day, as they all tend to mirror changes.

I refer to prime as BoC rate, since banks are free to set their own "prime", and even then, there's often a business prime and a pleb prime.

Prime.

[opendoor]

Originally Posted by Shazam

Bond rates are contingent on prime, not the other way around.

Bond yields are based on whatever investors are willing to pay to get the coupon rate. They're heavily influenced by central bank overnight rates, but other factors can influence them as well. If the market expects a recession, it's totally possible for overnight rates to be high while longer-term bond yields drop.

Regardless, it takes years to quell inflation. Years, boyos. Last time this idiocy happened it took two decades before rates normalized in Canada.

Only because they kept printing money through that whole period. During the 1970s and early '80s, Canada's M2 increased by about 16% a year; that's roughly equivalent to COVID money supply increase carried out repeatedly for almost a decade and a half. As soon as they cut that out, inflation dropped back down within a year or two.

Long term, inflation in Canada roughly correlates with M2 increases minus economic growth and productivity gains, with the difference between M2 growth and inflation being about 5% on average over the last 50 years. So given the timing of M2 increases in recent years (basically one outlier year in 2020) and the lag that normally occurs between supply changes and inflation, I don't think it's unreasonable to think that inflation can be brought down significantly in a relatively short period of time.

With the M2 growth in the last handful of years:

2017: 4.9%
2018: 5.4%
2019: 7.7%
2020: 18.6%
2021: 8.4%
2022: 5.2% (annualized)

We should be back on the long-term trajectory within a year or two if they continue with the modest growth. Will inflation follow? It's hard to say, but there are significant differences between now and money supply increases that happened during the runaway inflation of the '70s:

1970: 9.5%
1971: 12.6%
1972: 13.3%
1973: 19.2%
1974: 16.8%
1975: 13.7%
1976: 17.0%
1977: 13.0%
1978: 14.2%
1979: 18.8%
1980: 16.4%
1981: 11.6%
1982: 10.8%
1983: 5.86%

And unsurprisingly based on the numbers above, inflation dropped from 12.5% in 1981 to 4.3% by 1984. Once M2 growth slowed to single-digit levels, inflation dropped. Canada has already significantly slowed M2 growth, so it's decent bet that inflation will follow in the next year or two (unless they change their course).

[The Fonz]

Originally Posted by Shazam

I refer to prime as BoC rate

I wondered this, but the BoC overnight rate is at 3.25% after today's increase.

[Shazam]

Originally Posted by opendoor

Bond yields are based on whatever investors are willing to pay to get the coupon rate. They're heavily influenced by central bank overnight rates, but other factors can influence them as well. If the market expects a recession, it's totally possible for overnight rates to be high while longer-term bond yields drop.

Only because they kept printing money through that whole period. During the 1970s and early '80s, Canada's M2 increased by about 16% a year; that's roughly equivalent to COVID money supply increase carried out repeatedly for almost a decade and a half. As soon as they cut that out, inflation dropped back down within a year or two.

Long term, inflation in Canada roughly correlates with M2 increases minus economic growth and productivity gains, with the difference between M2 growth and inflation being about 5% on average over the last 50 years. So given the timing of M2 increases in recent years (basically one outlier year in 2020) and the lag that normally occurs between supply changes and inflation, I don't think it's unreasonable to think that inflation can be brought down significantly in a relatively short period of time.

With the M2 growth in the last handful of years:

2017: 4.9%
2018: 5.4%
2019: 7.7%
2020: 18.6%
2021: 8.4%
2022: 5.2% (annualized)

We should be back on the long-term trajectory within a year or two if they continue with the modest growth. Will inflation follow? It's hard to say, but there are significant differences between now and money supply increases that happened during the runaway inflation of the '70s:

1970: 9.5%
1971: 12.6%
1972: 13.3%
1973: 19.2%
1974: 16.8%
1975: 13.7%
1976: 17.0%
1977: 13.0%
1978: 14.2%
1979: 18.8%
1980: 16.4%
1981: 11.6%
1982: 10.8%
1983: 5.86%

And unsurprisingly based on the numbers above, inflation dropped from 12.5% in 1981 to 4.3% by 1984. Once M2 growth slowed to single-digit levels, inflation dropped. Canada has already significantly slowed M2 growth, so it's decent bet that inflation will follow in the next year or two (unless they change their course).

That's nice.

So when do you think the prime rate will be, say 1% again? Because historically speaking, 3.25% is hardly a high rate.

[opendoor]

Originally Posted by Shazam

That's nice.

So when do you think the prime rate will be, say 1% again? Because historically speaking, 3.25% is hardly a high rate.

Why would the Bank of Canada's rate be 1% again absent a financial crisis? That's an aberration historically. As inflation subsides, I expect they'll try to keep the overnight rate in a more neutral range like 2.5-3% like we saw in the '00s pre-financial crisis and for most of the time pre-1970s.

[Zarley]

Unfortunately it took an inflation crises driven by bad central bank behaviour to get us to this point, but ultimately it's a good thing if rates stabilize at 2.5%-3% to wean our economy off of cheap debt. It's going to mean a world of hurt for housing in Vancouver and the GTA though.

[blankall]

Originally Posted by Shazam

A familiar refrain. Mostly wrong though.

How is this mostly wrong? You think houses in the middle of the highest demand areas aren't less exposed to decreases?

Originally Posted by Shazam

Bond rates are contingent on prime, not the other way around.

I know. However, fixed mortgage rates are dependent on bond rates. I would agree that are all affected (and largely determined) by prime rates though, or at least what people think prime rates will do. When bond rates fall, interest rates can fall below prime though, for both fixed and variable rates.

So if in 2 years, people think that the BoC will start easing rates, you may see below prime fixed mortgage rates again.

Originally Posted by Shazam

And let's keep some perspective here. The prime rate is now only 3.75%. Hardly the stuff of panic. But whoo, people suck at finances.

Regardless, it takes years to quell inflation. Years, boyos. Last time this idiocy happened it took two decades before rates normalized in Canada.

Inflation is already playing out differently than it did in the 1970s/early 80s. Inflation already looks like it's easing off. Once again, a lot of the current inflation issues were caused by supply chain issues.

[GGG]

Originally Posted by Zarley

Unfortunately it took an inflation crises driven by bad central bank behaviour to get us to this point, but ultimately it's a good thing if rates stabilize at 2.5%-3% to wean our economy off of cheap debt. It's going to mean a world of hurt for housing in Vancouver and the GTA though.

We are still well within the stress test values so on a monthly basis people should be fine.

Anyone forced to sell may lose as prices drop based higher rates but that won’t be a catostrophic.

[Cecil Terwilliger]

Originally Posted by The Fonz

Correct, and CIBC Prime rose today from 3.95% to 4.70%.

Well then that’s weird because the guy you quoted was using the term incorrectly and was talking about the BoC overnight rate. Sure seemed like there was confusion.

Also, no Cibc did not raise their prime rate. It was already at 4.7. Most FIs have been at 4.7 for a month or more.

Originally Posted by Shazam

I refer to prime as BoC rate, since banks are free to set their own "prime", and even then, there's often a business prime and a pleb prime.

Prime.

Yeah no that’s not how that works. You can’t just choose to use the wrong terminology to describe something because you alone feel like it. Unless you’re in the media, then it’s expected.

[opendoor]

Originally Posted by Zarley

Unfortunately it took an inflation crises driven by bad central bank behaviour to get us to this point, but ultimately it's a good thing if rates stabilize at 2.5%-3% to wean our economy off of cheap debt. It's going to mean a world of hurt for housing in Vancouver and the GTA though.

I don't think there was any real issue with the Bank of Canada increasing the money supply in 2020 through purchasing government bonds. It was important to provide liquidity and in that type of scenario (where it's essentially a one-time thing), it's not a given that it will lead to any kind of inflation. For instance, Canada's M2 increased by almost 15% in 2008 (vs. 18.5% in 2020), yet inflation was well below the target range in the next couple of years.

They should have started raising rates sooner, as soon as inflation was ticking up. But ultimately I don't think that would have made a significant difference outside of real estate.

[Aarongavey]

Originally Posted by Zarley

Unfortunately it took an inflation crises driven by bad central bank behaviour to get us to this point, but ultimately it's a good thing if rates stabilize at 2.5%-3% to wean our economy off of cheap debt. It's going to mean a world of hurt for housing in Vancouver and the GTA though.

It is weird, Switzerland pumped a bunch of money into their economy during Covid and they do not have a large inflation increase. Same with Japan. It is almost as if there are factors beyond that that play into inflation.

[opendoor]

Originally Posted by Aarongavey

It is weird, Switzerland pumped a bunch of money into their economy during Covid and they do not have a large inflation increase. Same with Japan. It is almost as if there are factors beyond that that play into inflation.

Both of those countries had more modest increases in money supply (about 7-8% in 2020). And like you say, there are other factors. Despite very low interest rates, Japan has had persistently low inflation and often dips into deflation. So while their current inflation rate is low by most standards, it's still the 2nd highest they've had in the last 30 years.

Switzerland is similar; their inflation rate has hovered between -1% and 1.5% for basically the last 30 years with an average of 0.4% in that time period. But right now it's at 3.5%, which represents a significant departure.

[tvp2003]

Originally Posted by CroFlames

Thank #### I'm locked in for four more years.

I feel for the folks on variable rate mortgages. I finally got off that bus in December 2019 by converting to a fixed rate (after watching multiple interest rate hikes), only to see rates plummet back down a few months later due to Covid

Fortunately I managed to extend into a blended mortgage last fall to try and take advantage of the low rates — paid a bit more to push it to a five year term but I figured it would be worth the gamble.

[kevman]

I want to know when the banks are going to give us our .2% back on their lending rates.

In 2014 or so when the BOC rate was 1% and the banks had 3% prime rates the spread was 2%. When the BOC cut their rates .25% in consecutive sessions the banks only provided .15% cuts enlarging the spread to 2.2%. This summer when the BOC rate was 2.5%, the banks had a 4.7% prime rate. With the BOC jump to 3.25% are the banks going to 5.45% or are they finally going back to the historical spread of 2% over BOC rate?

[bizaro86]

Originally Posted by kevman

I want to know when the banks are going to give us our .2% back on their lending rates.

In 2014 or so when the BOC rate was 1% and the banks had 3% prime rates the spread was 2%. When the BOC cut their rates .25% in consecutive sessions the banks only provided .15% cuts enlarging the spread to 2.2%. This summer when the BOC rate was 2.5%, the banks had a 4.7% prime rate. With the BOC jump to 3.25% are the banks going to 5.45% or are they finally going back to the historical spread of 2% over BOC rate?

I agree with your gear grinder, but I think the answer to your question from a practical point of view is "never"

[Bill Bumface]

I'm pretty convinced opendoor is just the latest and greatest AI has to offer at this point.

[MillerTime GFG]

Just want to clarify a few things...

- Qualifying rate is the greater of benchmark rate (5.25%) vs contract rate + 2%.
- Maximum amortization on an insured ( <20% down) mortgage is 25 years.
- Maximum amortization on an uninsured ( >20% down/equity) mortgage is 30 years. You CAN qualify on a 30-year amortization at contract rate + 2%. 30-year amortizations do come with higher interest rates however
- If debt servicing ratios are tight, it typically makes most sense to go with a variable rate, as you can then qualify at the contract rate + 2%. For example, with prime rate going up to 5.45%, some variable rates can be found around 4.45%, meaning you can qualify at 6.45%. If you go fixed, most are around 4.60%, meaning you qualify at 6.60%.

[TorqueDog]

Originally Posted by Bill Bumface

I'm pretty convinced opendoor is just the latest and greatest AI has to offer at this point.

"Google Sidelines Engineer Who Claims opendoor Is Sentient".

[powderjunkie]

Originally Posted by kevman

I want to know when the banks are going to give us our .2% back on their lending rates.

In 2014 or so when the BOC rate was 1% and the banks had 3% prime rates the spread was 2%. When the BOC cut their rates .25% in consecutive sessions the banks only provided .15% cuts enlarging the spread to 2.2%. This summer when the BOC rate was 2.5%, the banks had a 4.7% prime rate. With the BOC jump to 3.25% are the banks going to 5.45% or are they finally going back to the historical spread of 2% over BOC rate?

Can I be disingenuous and rant about how they increased the gap by 10%?!?!?!?