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Financial markets

Market Volatility: Bank of Canada Rate Hike and Implications for Prime and Mortgage Rates

Strategic Insights

— 1 min read

The Canadian dollar reached a low of 71.61 cents (U.S.) yesterday, prompting the Bank of Canada to intervene in support of its value. The dollar recovered slightly by late in the day, but treasury bill yields rose sharply, indicating a potential Bank of Canada rate hike of up to three-quarters of a percentage point. This would push the bank rate above 7 percent for the first time since early 1993, forcing banks to raise prime rates by at least half a percentage point, potentially to 8 percent.

Key Takeaways:

  • The Bank of Canada's rate hike could push the bank rate above 7 percent for the first time since early 1993, forcing banks to raise prime rates by at least half a percentage point.
  • Royal Bank has already raised its mortgage rates, with a five-year mortgage now costing 9.75 percent, up from 9.5 percent.
  • The high level of government deficits and political uncertainty over the future of Quebec are contributing to market volatility, with investors selling Canadian bonds and dollars.
  • The federal government's recent issue of three-year bonds in the Euromarket was met with lukewarm demand, and interest rates on bonds are rising due to concern over Quebec.
  • Market analysts are predicting a choppy summer for markets, with interest rates and bond yields likely to remain volatile until after the Quebec election this fall.

Statistics:

  • The Canadian dollar fell to 71.61 cents (U.S.) yesterday, its lowest level since early 1994.
  • Treasury bill yields rose by up to three-quarters of a percentage point, indicating a potential Bank of Canada rate hike.
  • The bank rate is currently set at 6.75 percent, up from 6.5 percent in late January.
  • Royal Bank's five-year mortgage rate is now 9.75 percent, up from 9.5 percent.
  • Investors are selling Canadian bonds, with the benchmark Government of Canada 30-year bond falling by $14.50 for each $1,000 in face value.
  • The yield on the Government of Canada 30-year bond is currently 9.47 percent, up from 8.6 percent in late January.
  • The Bank of Canada will hold an auction of $2 billion in five-year bonds tomorrow, but it is unclear how much demand there will be due to market volatility.

Sources:

  • Bank of Nova Scotia, Bank of Montreal, MMS International, Technical Data, Bloomberg Business News, Canadian Press

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