BANK OF CANADA HIKES INTEREST RATE

The consensus in the Canadian treasury bill market suggests that this latest Bank of Canada hike will be the last until the spring or early summer of 2011. However, if the rate of inflation remains close to the Bank’s two per cent target and consumer and business spending continues to track the Bank of Canada’s outlook, it is possible that the further rate hikes could be brought on line either this year or earlier than expected in 2011. The recent rate hike will impact mortgages and lines of credit which have floating interest rates based on the prime lending rate. Fixed rate mortgage products will not necessarily be affected, given that the market has already priced in expectations for future Bank of Canada interest rate decisions. For example, the yield on five-year government of Canada bonds, which influence five-year fixed mortgage rates, has been dropping in recent months. This reflects the market view that the Bank will not raise its policy rate as much or as quickly as anticipated earlier this year.