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Banking industry

Canadian Markets Bracing for Prime Rate Increase Amidst Quebec Politics and Fiscal Concerns

Strategic Insights

— 2 min read

Investors are selling their treasury bill holdings and driving up borrowing costs as concerns over Quebec's political and fiscal situation and Bank of Canada policy continue to grow. The chartered banks raised the prime rate to 7.5 per cent just a week ago, and lenders have followed suit by increasing most mortgage rates by half a point. A one-year loan is now 9 per cent at some banks.

Key Takeaways:

  • The Bank of Canada is expected to increase the prime rate by as much as 75 basis points today, taking it to more than 8 per cent for the first time in two years.
  • The sharp deterioration in money markets points to a rate increase of about 65 basis points in the Bank of Canada rate today from last week's setting of 6.32 per cent.
  • The Bank of Canada intervened in both currency and money markets yesterday to try to halt the "fierce" selling pressure, buying the dollar at 72.15 cents (U.S.) and purchasing three-month bills at 6.75 per cent.
  • The "fear and panic which have taken grip of the money market" have been triggered by greater awareness of growing risks because of Quebec's higher-than-expected budget deficit and the sovereignty agenda announced by Premier Jacques Parizeau.
  • The gap between three-month rates in Canada and the United States is the highest since the Sept. 12 Quebec election, reflecting the deterioration in sentiment about Canadian holdings.
  • U.S. banks are currently charging 8.5 per cent on prime rate loans, while Canadian lenders are charging a full percentage point lower at 7.5 per cent.
  • The Bank of Canada appears to be concerned that the recovery in Canada remains slower than in the United States, with a lot of slack remaining in the economy.

Statistics:

  • The expected increase of 75 basis points in the prime rate would be the largest hike since 1991.
  • The Bank of Canada rate is expected to increase to 6.97 per cent from last week's setting of 6.32 per cent.
  • The three-month yield for Canadian treasury bills is now 6.85 per cent, up 30 basis points from Friday.
  • The bank's short-term funding costs climbed by 25 basis points yesterday, narrowing the gap between one-month banker's acceptances and prime to 128 basis points.
  • The current mortgage rate is 9 per cent at some banks.

Sources:

  • "Money Market Fears Grip Canada" - MMS International, cited in the article
  • Citi Bank Canada Inc., quoted in the article as saying the hike will take place "within a couple of days"

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