October 12, 2010
So BMO’s lowering rates. According to their press release, they decreased fixed rates across the board by 10 basis points (or 0.1 per cent). That’s a good thing, right? Well, not necessarily.
The outlook for the US economy is anything but encouraging. So, recently, bond interest rates have fallen because it looks like the Federal Reserve is going to provide further stimulative measures. What does that mean?
It means that interest rates will go even lower. So, bondholders are reacting. People who deal with bonds are usually people with a lot of money who know what to do with it. So when bondholders start pressuring rates lower, it generally means that interest rates in general will trend downward as well.
Another reason that BMO lowered rates is because of the Canadian economic outlook. Although Carney has been raising rates steadily for the since the Spring, Bay Street expects him to cool down and allow rates to plateau for a while.
According to Moneyville:
The Bank of Canada…is expected to hold its trendsetting interest rate steady for the forseeable future — another factor driving bond market sentiment on this side of the border.
So, the long short of it then is this: bondholders are anticipating the actions of the Federal Reserve to provide more stimulus given that the US situation is not improving. Bondholders are also anticipating a break in the interest rate hikes that the Bank of Canada has been initiating lately. BMO is reacting to the bondholders’ response. And, voila! You have lower mortgage rates.
You’ll probably see other retail banks follow suit in the next little while. Just wait!