Here we go again. I wrote the other day that spreads on five year fixed mortgage rates have been increased by as much as .80% or more over the same time last year. As you recall this increased spread is to do with the tightening of funds and consequently a higher cost of funds for the banks.
The problem is worsening though. Bond prices are shooting up, due to investors flocking there for greater security even though their returns are less. This of course drives yields down which increases the spreads the banks are making on five year mortgage money.
Here’s the rub, the Bank of Canada is not following suit of the European Union and the Federal Reserve in the US by injecting money into these markets to lower the banks cost of funds, and thus lower five year fixed rates for us.
Almost every economist in Canada is now calling on the Bank to inject 100′s of millions into the term market and do it now. This coupled with a predicted .25% rate cut in December or January will bring some reduced pressure on the consumer in terms of borrowing costs on Five Year money.
Why aren’t the banks doing it you ask? Because their defiance has effectively contributed to the slowdown in the economy which of course they LOVE. When inflation is below their target they are happy. But with the dollar appreciating, and the markets pricing in rate cuts, and now this, the Bank has to do their job and bring stability to the credit markets in Canada, or I fear we are headed for some drastic challenges.
Greg Williamson
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