INTEREST RATES JUMP, MORTGAGE RATES TO FOLLOW?

INTEREST RATES JUMP, MORTGAGE RATES TO FOLLOW?

Historically low funding costs for Canadian banks translated to deep discounting of mortgage rates for homebuyers with most lenders offering five-year fixed

mortgages equal to the prime rate of just 3 per cent. In fact, and in spite of attempts by some policymakers at discouraging lower rates, some lenders continue to advertise fixed-rate mortgages at well below prime.

However, depending on the sustainability of the recent rise in interest rates, those discounts may become scarce. It is difficult to cite a definite cause for the recent rise in interest rates, and much of the rise in Canadian interest

rates may have more to do with what is going on in the United States than in the domestic economy.

Mortgage Rate Forecast
	2013				2014
Term	Q1	Q2F	Q3F	Q4F	Q1F	Q2F	Q3F	Q4F
1 Year	3.00	3.00	3.00	3.00	3.00	3.00	3.10	3.15
2 Year	5.22	5.14	5.24	5.34	5.34	5.44	5.56	5.56

Generally, rising medium and long-term interest rates result from one of three scenarios. Markets may be concerned about government debt burdens and therefore demand higher interest rates. In addition, comments by

central bankers may drive the market to perceive a more hawkish stance for monetary policy, which would push long rates higher. Finally, markets may be pricing in a more positive global economic outlook and therefore

a return to a more normal shaped yield curve. Each of these scenarios implies a mix of different behaviors in asset markets as shown in the table below.

Interest Rate Typology

Scenario	Interest Rates	Stock Prices	Currency
Debt Concerns	UP	DOWN	DOWN
Hawkish Central Bank	UP	DOWN	UP
Stronger Recovery	UP	UP	UP

HIGHLIGHTS

•          Long-term interest rates spike from historic lows

•          Canadian economy off to a better than expected start

•          Bank of Canada – New boss, same policy