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BMO Financial Group

April 17, 2012 11:48 ET

Bank of Canada May Raise Interest Rate Sooner Than Expected-BMO Economics

- BMO Economics changes rate projection; interest rates could climb by January 2013 or even sooner

- According to the BMO Housing Report, current conditions heavily favour fixed mortgage rates over variable

- Two-thirds of Canadians are looking to lock-in to a fixed rate mortgage

TORONTO, ONTARIO--(Marketwire - April 17, 2012) - Following clear signals from the Bank of Canada that it may not leave its overnight rate at 1.0 per cent for very much longer, BMO Economics has brought forward its prediction for the first rate hike to January 2013 instead of the third quarter of next year.

"The Bank of Canada's Statement this morning is every bit as hawkish as many expected, and then some," said Doug Porter, Deputy Chief Economist, BMO Capital Markets. "The Bank is clearly uncomfortable with keeping interest rates below inflation when household debt continues to grind higher, and with the economy poised to reach capacity by early next year. At a minimum, the Bank will be raising rates before the economy reaches full potential, sometime in the first half of next year."

Mr. Porter concluded that if the global backdrop co-operates, the Bank will be moving even sooner than 2013, given their revised outlook for inflation and the output gap.

Furthermore, while BMO Economics has supported choosing variable rates over the past few years, their view has changed based on current offers on long-term mortgage rates and interest rate increases coming earlier than previously expected.

"Our interest rate outlook now projects that fixed mortgage rates will trump variable. While the decision ultimately depends on the individual, the low rate combined with a shorter 25-year amortization will significantly strengthen household financial stability," according to a report penned by Mr. Porter and Benjamin Reitzes, Senior Economist, BMO Capital Markets. "For those who are without financial flexibility and would run into difficulty from a pronounced upswing in interest rates, the potential extra cost for the protection of household finances now appears to be a price well worth paying."

A BMO Bank of Montreal study shows Canadian homebuyers are looking for payment certainty for as long as possible and the majority (65 per cent) are looking to lock-in at a fixed rate to take advantage of low interest rates.

"Up until recently, interest rate hikes may not have been top of mind for Canadians, but there are now signals that rates are set to change sooner than expected," said Laura Parsons, Mortgage Expert, BMO Bank of Montreal. "BMO has been encouraging Canadian homebuyers to stress-test their mortgages and ensure that an increase in interest rates is manageable. Having rate certainty can help protect Canadian households from interest rate spikes."

The survey was completed on-line from February 21 to 23, 2012, using Leger Marketing's online panel, LegerWeb. A sample of 1500 Canadians, 18+, were surveyed. A probability sample of the same size would yield a margin of error of +/-2.5%, 19 times out of 20.

About BMO Financial Group

Established in 1817 as Bank of Montreal, BMO Financial Group is a highly-diversified North American financial services organization. With total assets of $538 billion as at January 31, 2012, and more than 47,000 employees, BMO Financial Group provides a broad range of retail banking, wealth management and investment banking products and solutions.

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