Each Institution has its own reason justifying why their Bank of Canada overnight lending rate forecast appears their way. Clearly no single forecast matches another. These forecasts are prepared by qualified persons and each of them defines the word “risk” in their own fashion.
BoC rate and Bank Prime Rate:
We are interested in the Bank of Canada lending rate because the banks set their Prime Rate based on this rate. Usually the Prime Rate is 200 basis points higher than Overnight Rate.
Prime Rate and Mortgage Rates:
If you have a variable rate mortgage then it is anchored to the prime rate. Any borrower with a variable rate will keep a watchful eye on the BoC rates. Apart from an ARM or VRM borrower, anyone with an open Line of Credit or a HELOC monitors that rate too. Business loans are also tied to the Prime rate. So, there are a large number of audiences who follow the BoC meetings keenly.
The Real Path:
Although all the forecasters are predicting different outcome, they have a common ground. As of now no one is anticipating a rate reduction in the future. Therefore we have a point – “based on present conditions the interest rate will only go up in future”.
If we remove the Scotia bias about a stalled rate till 2014, then there is fair bit of possibility that the rate will start to go up by the end of 2013.