Until a few weeks ago, it seemed likely that the US Federal Reserve FOMC was well on it way to announcing an interest rate increase – but with the recent market volatility, things may be changing. With China showing signs of causing a global economic slowdown and the future of Greece in the Eurozone still uncertain, a growing number of economists and policy experts have expressed concern about the timing of the Fed’s next rate increase.
The latest market moves are likely to intensify concerns over whether China’s economic slowdown will spill over into the U.S. and whether the Federal Reserve is likely to delay plans to start to raise interest rates from near zero for the first time in about a decade. – Wall Street Journal, August 25th 2015
Additionally, a recent op-ed by former U.S. Treasury Secretary, Larry Summers in the Financial Times urges the Fed to avoid making “a dangerous mistake” by raising rates in September. However 5-year through 30-year US Treasury bond rates were dropping on Tuesday, with short-term bond rates increasing. The volatility is continuing with the overnight market in China and elsewhere overseas.
So – how does this affect housing in Victoria? When the US Federal Reserve does raise rates, it will further devalue the Canadian dollar (currently hovering about $0.75 US). The only monetary tool that the Bank of Canada can use to increase the value of the Canadian dollar is to raise the overnight rate – bumping up the prime rate that banks use as the basis of variable rate mortgages. Additionally, an increase the the Fed’s interest rate will boost US Bond rates (both government and private), causing Canada’s banks to raise their bond rates – which form the basis for the fixed-rate mortgages in Canada. In other words, if the Fed holds off on an rate increase – then the current low interest rates will persist … but when rates are raised, Canadian fixed-rate mortgages will climb and variable-rate mortgages will follow suit when the Bank of Canada raises their rate.
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