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Bank Of Canada Raises Prime Rate…by 25 Basis Points?

The big announcement in finance yesterday, was that the Bank of Canada finally raised their prime rate.  Now although raising the prime rate was not a surprising announcement to the market, the amount they raised it by was. 

Economists predict that the Bank Of Canada’s prime rate will be 3.25% by the end of 2010.  Yet it only increased by 25 basis points yesterday.  Given the fact that the Bank Of Canada’s 5-year fixed mortgage rate has increased by 100 basis points in the past couple of months, is a variable mortgage rate still the better deal?

Now hardcore economists will argue that prime rate will dramatically increase in the near future, which should cause the cost of capital between variable and fixed rates to be similar (in the long-run).  But given the uncertainty in the world’s markets, how can anyone predict how the market will do in the future and how corresponding interest rates will react?  In my humble opinion this slight increase in Canada’s prime rate has just strengthened my recommendation to select a variable mortgage product.

Posted by: Kevin Somnauth, CFA…For your Sudbury Mortgage

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