Here’s a quicky update:

Rate Uncertainty & Ben Tal’s Call

Choosing between a fixed or variable mortgage can seem like throwing darts with your eyes closed.

Borrowers today are seeing headlines like this:

Economists want BoC to keep raising interest rates

Then they turn the page and see this:

Could the Bank of Canada be forced to cut rates again?

Even the Bank of Canada’s Mark Carney isn’t too sure of the future.

On CBC yesterday Carney said, “Upside risks are balanced by downside risks…The upside is as likely as the downside.”

At a FirstLine Mortgages event yesterday, CIBC economist Benjamin Tal translated that. “What Carney is telling us,” Tal said, “is (the Bank of Canada) has no clue what is going to happen.”

Tal added:

“The bond market is pricing in inflation below 1.50% for the next ten years.” (But he believes “the bond market is mispricing inflation.”)
The Bank of Canada now predicts the economy won’t reach its full potential until year-end 2012, one year later than previously expected.
The BoC doesn’t need to raise rates to slow consumer credit because “it’s already happening.”
Consumers’ spending capability is at a “30-year low.” It won’t take many rate hikes to slow the economy from here.
As a result, Tal asserted: “I don’t expect (variable or fixed) mortgage rates to rise in any significant way in the next 12 months.” There is “no rush to make a mortgage decision.”

When someone in the audience asked him which mortgage he’d take today (fixed or variable), Tal replied:

“I’m almost convinced that over the next 2-3 years variable will be better. In the last two years fixed will be better. But, the gap (between fixed and variable) will not be significant over five years.”

That said, if he had to choose today, he feels that “mathematically speaking,” variable-rate mortgages will “probably” outperform fixed rates.

Due to a stronger currency, Canadians have been able to more easily afford luxury imports, vacations, or properties abroad – the National Hockey League has even benefited. The strong Loonie helped spur the highest operating profits for several Canadian NHL teams in more than a decade. One team’s president said, “There are always two absolutes: Winning is good, and it’s always better when the Canadian dollar is stronger.”

The Bank of Canada has not indicated any intention to discontinue its conditional commitment to hold key interest rates steady until the end of the second quarter of 2010. However, there is concern that the low interest rates could potentially spur financial bubbles.

Canada, like most other countries emerging from a recession, is seeing several positive signs, but should expect recovery to come in small steps. This is especially true as Canada depends on strong demand from other countries to import its goods.