On the same day the Bank of Canada bumped its key lending rate up, a major chartered bank edged a key mortgage rate down, moves that reflected the continuing uncertainty in world financial markets.
The Bank of Canada on Tuesday became the first G7 central bank to raise interest rates since July 2008, hiking its key overnight lending rate one-quarter of a percentage point to 0.5 per cent in a long-anticipated move aimed at keeping Canada's recovering economy from overheating.
However, with uncertainty over the global economy mounting due to turmoil in the European Union, the pressure for future short-term rate increases might be easing.
The turmoil has caused interest rates for longer-term bonds to fall, allowing the Bank of Montreal to trim its five-year discount mortgage rate one-tenth of a percentage point to 4.25 per cent.
Having short-term rates rising while long-term rates are falling, "is a very unique situation we haven't seen in a very long time," said Benjamin Tal, a senior economist with CIBC World Markets.
He said it was "a bold move by the Bank of Canada realizing there is a real risk it will have to [pull back interest rates] after this move."
Commenting on his decision, Bank of Canada governor Mark Carney said "any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," given the uncertainty around the global recovery.
Carney said the decision "still leaves considerable monetary stimulus in place, consistent with achieving the two-per-cent inflation target in light of the significant excess supply in Canada."
The decision came a day after Statistics Canada reported the domestic economy had its strongest quarterly performance in over a decade, as GDP expanded by 6.1 per cent in the three-month period ended March 31.
Tal said one of the reasons Canadian bond interest rates have fallen after increasing in April is because the market had priced in a more aggressive move by the Bank of Canada.
Tal added that it is becoming uncertain whether the central bank will need to continue raising rates at its next meeting in July.
"Even the Bank of Canada isn't convinced they will move again," Tal said.
Doug Porter, deputy chief economist for BMO Capital Markets, said Carney's statement "was unambiguously on the dovish side of expectations with the bank almost bending over backwards to indicate this is not necessarily the start of a relentless campaign to crank rates higher."
In the meantime, Tal said home buyers in the mortgage market also face a unique situation with first-time buyers getting a second opportunity to take advantage of relatively low fixed-term interest rates on longer-term loans, which are tied to the bond market.
Those who already have variable mortgages, which are tied to the bank's prime borrowing rate and influenced by the Bank of Canada's key rate, can expect higher loan payments.
"Ultimately, the [variable-rate] increases will not be significant," Tal predicted.
With variable mortgage rates one-quarter to half a percentage point below the major banks' prime rate of 2.25 per cent, Tuesday's rate change won't add a lot to most monthly mortgage payments.
"A quarter-point increase [does not have] a huge impact," Joanne Vickery, president of the Mortgage Brokers of B.C., said in an interview.
On a $250,000 mortgage amortized over 25 years, for instance, the bump would increase a borrower's mortgage payment by almost $30 to $1,058.
But in future, Vickery said, borrowers should pay more attention to rates and how increases could pinch their budgets.
The Canadian Association of Mortgage Professionals estimates three out of every 10 Canadian mortgage holders have opted for variable-rate loans, which are still a good deal given five-year fixed rates range from BMO's 4.25 per cent to 4.59 per cent.
However, Carolyn Heaney, BMO's area manager of business development in Metro Vancouver, said the bump in rates should be an incentive for borrowers to "stress test" their budgets to determine where their "sleep-at-night factor is, and how comfortable they are with changing interest rates."
depenner@vancouversun.com
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