Should I lock in my mortgage rate for a fixed term while they are still relatively low? Should I stick with a variable interest rate since they are still at all time lows? Are we going back to interest rates as high as those in the 80s? These are the questions on the lips of most people these days!
I attended two Economic reviews last week and they were talking about the Canadian interest rate forecast for 2010 – 2011. Why would they not provide interest rate forecasts for the next 5 years? Because it’s like forecasting the NHL standings for the next 5 years, do you really think you it’s possible? As you can see in my previous post about the Canadian interest rate forecast for 2010, most economists can’t agree on the pace of the increases of interest rates.
So today I am offering a little bit more about what will happen with Canadian interest rates for the rest of 2010 and 2011:
The variable interest rate is heavily influenced by the Bank of Canada. In order to make their decision, they meet 10 times per year, look at the overall economy, imports, exports, job creation and several other economic indicators. However, one of the Bank’s priorities is to contain the rate of inflation.
When they increase the interest rate, inflation should remain stable or decrease. When they decrease the interest rate, it tends to stimulate the economy and resulting in rising inflation later on. The goal is to keep the inflation rate between 1 and 3% with an “ideal” inflation rate of 2% (this is where we are at right now).
There are currently 2 major factors that limit inflation going further: the Canadian Dollar strength and the high rate of unemployment (8.2%) which is limiting the consumer spending. However, we all know that over the next 6 months, a move on the Canadian interest rate will be necessary to maintain the inflation at an acceptable level.
I’ll make my own interest rate forecast (just for fun ;-). Based on what I know, and what I have heard/read from different economists, here are my interest rate predictions:
#1 The Canadian interest rate will increase over this summer (probably starting in June, duh!).
#2 The Bank of Canada will increase the interest rate at a rate of 25 to 50 basis points at a time. They won’t be rising the interest rate by 3% annually.
#3 I think the variable rate will reach 3% by December 2010 and something like 4.5% by December 2011 (all right, this one is really a blind forecast 😉 but, what if I’m right? Hehehe!).
You will probably read several Canadian interest rate forecasts written by bloggers, journalists and economists. We will all agree on one point: Interest rates will go up for the next 2 years.
However, I don’t think that the interest rate will go up that much since the US won’t touch their interest rate until 2011 and if we push it too high on the northern frontier, we will slow down our economy to their pace…
If you have a variable rate, I would keep it (this is what I do anyways!) and if you have a fixed rate, I hope you have a good one because the era of 3.70% for a 5 years interest rate is already over 😉
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