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How Unfolding Events in China Are Likely to Impact Canadian Mortgage Rates – Monday Morning Interest Rate Update (August 31, 2015)

by Dave Larock

Mortgage Rate ConceptChina has been in the news a lot lately as it tries to shift its economic focus away from infrastructure spending and export-led growth toward increasing domestic demand and expanding its service sector.

What is happening in China matters to Canadians, and specifically to Canadian mortgage borrowers, because China has been the marginal buyer of the world’s commodities for many years now. Our economic momentum is still highly correlated with changes in the global demand for commodities, and as such, even though we do not have much direct trade with China, we still keenly feel the impacts of its slowing growth rate.

The rest of world also watches its second largest economy closely and there have been two developments that have garnered a lot of ink of late.

First, earlier this month, China announced that it would devalue its currency after letting it rise for nearly a decade. There were differing opinions on why China did this. Some believed that China wanted to weaken its currency as a way to boost flagging export demand, which had dropped by an estimated 8.3% in July on a year-over-year basis. Second, others argued that China was trying to shift the yuan away from its well-established peg to the U.S. dollar, which is inconveniently high at the moment, and thereby allow it to move more freely in response to market forces.

While both factors were probably at play, I believe that there is a third important factor: perhaps China’s primary goal was to make the yuan a more market-based exchange rate. China has been petitioning the International Monetary Fund (IMF) to include the yuan among its basket of official reserve currencies, and letting the yuan float was one of the IMF’s key conditions for this approval.

Regardless of China’s motives, other countries are also expected to devalue their currencies in response. Currency devaluation is a zero-sum game, often referred to as a ‘beggar thy neighbour policy’ because any related improvements in China’s export demand will come at the expense of other countries, leaving them little choice but to respond in kind. The U.S. dollar has surged of late and therefore the prospect of an East Asian currency war should decrease the odds that the U.S. Federal Reserve will raise its policy rate any time soon. A rate hike against this backdrop would push the greenback higher still and heap more suffering on U.S. exporters. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why Today’s Fixed Versus Variable Debate Is All About the Spread – Monday Morning Interest Rate Update (August 24, 2015)

by Dave Larock

Mortgage Rate ConceptCanadian mortgagors from past generations look on with envy at borrowers today, who must decide whether record-low fixed-mortgage rates and/or rock-bottom variable-mortgage rates are the best option. While past generations would have camped out overnight on the sidewalk to take either of today’s five-year mortgage rates, today’s borrowers still agonize over their choice.

To help inform this age-old decision in our current environment, this week’s post will explain why I think that the spread between today’s fixed and variable rates is the key factor to consider when deciding between these options.

Right now a competitive five-year variable rate with excellent terms and conditions can be found in the 2.00% range, while a good five-year fixed-rate mortgage is in the 2.50% range. The current 0.50% gap between these two options is quite narrow by historical standards, and would be closer to 1.00% under more normal (and stable) economic circumstances.

If you are leaning towards a variable rate today, the 0.50% gap between five-year fixed and variable rates can be thought of as the ‘margin of safety’ that protects you if/when your variable rate starts to rise. Since the Bank of Canada (BoC) typically increases its overnight rate, on which variable-rate mortgages are priced, by 0.25% increments, it would only take two increases by the BoC before today’s five-year variable rates cost the same as the available five-year fixed-rate alternatives.

Of course, this assumes that variable rates won’t fall further, but that assumption seems reasonable with the BoC’s overnight rate currently sitting at 0.50% – and I write this even as the Chinese stock market plummets and contagion fear begins to spread to North American markets. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why I’m Not Buying the Consensus View That the U.S. Federal Reserve Will Raise Its Policy Rate in September – Monday Morning Interest Rate Update (August 17, 2015)

by Dave Larock

Mortgage Rate ConceptMarkets remain focused on whether the U.S. Federal Reserve will raise its policy rate when it next meets in September. Investors are assigning increasing odds that it will but I remain unconvinced.

There is no doubt that U.S. economy is improving and the U.S. job numbers have showed continued strength after some loss of momentum to start the year, but the future of the U.S. recovery is still far from assured.

For example, while the official U.S unemployment rate hovers at 5.3%, more detailed measures of the U.S. unemployment data which include discouraged workers and those working part-time because they cannot find full-time work indicate that more than 10% of the available U.S. workforce is still either unemployed or underutilized.

Meanwhile, overall U.S. inflation still hovers just above 0% and while it’s true that this is partly a result of the temporary effects of the surging U.S. dollar, other longer-term trends are also keeping prices down. For example, average wages have only risen by 2.1% over the last twelve months, which is less than would be expected given the improvements in the employment data, and falling energy costs have also helped to keep average prices in line.

Speaking of the surging U.S. dollar, prominent Canadian economist David Rosenberg recently noted that the Greenback’s sharp rise has created a headwind for the U.S. economy that is equivalent to a 3.00% rise in the Fed’s overnight rate, which is felt mainly by U.S. exporters whose products are now less competitively priced in international markets. If the Fed does raise its overnight rate in September, this rise will lift the Greenback higher still, thus exacerbating the impact of such a move.

There is an old saying that history doesn’t repeat itself but it does rhyme. To that end, the Fed is keen to draw lessons from its past monetary-policy mistakes and it remembers well that it raised rates too quickly during the Great Depression, prolonging that downturn as a result. This inherited bias towards looser policy is also bolstered by the Fed’s belief that its tools are better suited to reining in inflation if rates are kept too low for too long, as opposed to counteracting deflationary forces if rates are raised too quickly instead.

It seems clear from the recent commentary of its voting members that the U.S. Fed would like to raise its policy rate, and given that markets are expecting it to do so, perhaps September is as good a time as any. But is the Fed really ready to raise, or does it just want markets to think that it will do so as a way to keep lower-rates-for-longer speculators in check? read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Current Canadian and U.S. Employment Trends Mean for Our Mortgage Rates – Monday Morning Interest Rate Update (August 10, 2015)

by Dave Larock

Mortgage Rate ConceptLast week we received the latest U.S. and Canadian employment reports and both offered useful insights into where Canadian mortgage rates may be headed.

The U.S. nonfarm payroll report showed that the U.S. economy added 215,000 new jobs overall in July. The prior May and June nonfarm payroll estimates were also revised upwards by another 14,000 jobs. Digging a little deeper into the details, the U.S. economy added 536,000 new full-time jobs last month, with that number being partially offset with a big drop in part-time employment. Average hours worked rose by an impressive 0.5%.

Despite this continued strength in U.S. employment momentum, which lends support to the belief that a rate rise is imminent, there was still plenty of debate about how the report might influence the U.S. Fed’s decision to raise its policy rate for the first time in almost a decade when it meets in September.

That’s because average hourly wages only rose by 0.2% for the month, and they have only risen by about 2% over the most recent twelve months. That is an important statistic and it is not showing strength.

Some market watchers continue to believe that the slow rise in average U.S. wages combined with the complete lack of overall U.S. price inflation thus far in 2015, as measured by the Consumer Price Index, gives the Fed more time to be patient. Furthermore, a look at broader employment growth trends shows that the U.S. economy added an average of 246,000 new jobs per month in 2014, as compared with an average of 211,000 new jobs per month in 2015. Thus, while overall U.S. job growth continues, it is losing some momentum, and the Fed may be concerned that a rate rise could exacerbate that deceleration. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Will Mortgage Rates Head Higher in 2015? Tuesday Morning Interest Rate Update (August 4, 2015)

by Dave Larock

Mortgage Rate ConceptThe U.S. Federal Reserve issued its latest press statement last week and it didn’t leave me with the impression that it would raise its short-term policy rate in the near future, as some still expect it will.

The Fed’s timing matters to Canadian mortgage borrowers because the U.S. and Canadian economies are tightly linked and as such, our monetary policies tend to move in the same direction over the long run, even though they can diverge for a period of time (as is expected to be the case if the Fed starts tightening any time soon).

Interestingly, while many economists think that the Fed will hike its policy rate as early as September, bond market investors are now pricing in only a 20% probability of that occurring.

One group has it wrong.

Here are five highlights from the Fed’s latest statement to help inform your opinion on who that might be, with my comments in italics: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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All Eyes on the U.S. Federal Reserve This Week – Monday Morning Interest Rate Update (July 27, 2015)

by Dave Larock

Mortgage Rate ConceptWhen the U.S. Federal Reserve meets this week, investors will be parsing its accompanying statement for any hint that it will raise its policy rate at its September meeting. If signs of an imminent rate rise are detected, we may well see a spike in both U.S. and Canadian bond yields that could push our fixed mortgage rates higher over the short term. As such, anyone who might be in the market for a mortgage in the near future is well advised to lock in a pre-approval now, just in case.

Forewarned is forearmed.

Five-year Government of Canada bond yields rose by six basis points last week, closing at 0.77% on Friday. Five-year fixed-rate mortgages are offered in the 2.49% to 2.59% range and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the size of your mortgage and the terms and conditions that are important to you.

The Bottom Line: I still don’t think that the U.S. Fed will raise its short-term policy rate in September, but it may try to test the market’s readiness for monetary-policy tightening with more bullish interest-rate commentary in this week’s statement. Also, if the Fed does plan to keep rates lower for longer, striking a little fear and uncertainty into the hearts of speculators will help keep complacency, along with all of its potential excesses, at bay.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Five Key Questions Relating to the Bank of Canada’s Latest Rate Cut – Monday Morning Interest Rate Update (July 20, 2015)

by Dave Larock

Mortgage Rate ConceptLast week the Bank of Canada (BoC) lowered its overnight rate from 0.75% to 0.50% in an effort to counteract downside risks to inflation and weaker-than-expected overall economic growth.

The Bank also downgraded its projections for GDP growth to “just over 1% in 2015 and about 2 ½ per cent in 2016 and 2017”, and now projects that “the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017”. Reading between the lines, that means that the Bank doesn’t expect to raise its overnight rate for about another two years.

I was surprised by the BoC’s decision for the reasons outlined in last week’s post. In summary, I thought that our policy makers would judge that our economy needed fiscal stimulus more than monetary stimulus in the current environment, and that they would worry that cheaper borrowing rates could further elevate our household borrowing rates, which the BoC has repeatedly flagged as the most significant domestic risk to our economy.

In the end, the Bank acknowledged this risk but felt that more monetary stimulus was required to help our economy continue its “significant and complex adjustment”.

In today’s post I’ll address five key questions relating to the BoC’s latest rate drop: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Will the Bank of Canada Cut Its Overnight Rate This Week? Monday Morning Interest Rate Update (July 13, 2015)

by Dave Larock

Mortgage Rate ConceptThis week’s big question is whether the Bank of Canada (BoC) will cut its overnight rate when it meets on Wednesday. It’s a tough call for the BoC because there are plenty of compelling reasons both for and against lowering this key rate from its current 0.75% level.

As a reminder, lender prime rates, on which our variable-rate mortgages are priced, typically move in lockstep with the BoC’s overnight rate. Our fixed mortgage rates are priced on Government of Canada (GoC) bond yields, and while these are not directly correlated with the overnight rate, GoC bond yields do move in the same direction of the overnight rate over time. As such, if you’re keeping an eye on where mortgage rates are heading, the BoC’s overnight rate is the one to watch.

The consensus believes that the BoC will lower on Wednesday, and there are plenty of reasons why. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Greeks Say No. Will Their Creditors Echo That Sentiment? Monday Morning Interest Rate Update (July 6, 2015)

by Dave Larock

Mortgage Rate ConceptThe Greek debt crisis took another dramatic turn yesterday when its citizens voted by a 62% majority to reject the latest bailout demands from its creditors.

Interestingly, these demands were part of a bailout package that actually expired last week, so technically there was no active offer still on the table from the Troika (comprising the uropean Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission). Regardless, the vote result confirmed that the overwhelming sentiment among Greek voters is that any new negotiations with its creditors must include significant debt relief.

The result has emboldened Greek Prime Minister Tsipras, who is anxious to return to the negotiating table with his new mandate after recently promising voters that it might take as little as forty-eight hours after the referendum to reach a new agreement with the Troika. He will do this without his controversial finance minister, Yanis Varoufakis, who resigned last night after the vote in an apparent concession to the country’s creditors, who had grown tired of his defiant stances during negotiations.

Prime Minister Tsipras was careful to emphasize that this was a vote against austerity, and not against remaining in the euro zone, in a speech made after the vote: “I’m fully aware that the mandate that I was given (by voters) is not for a rupture with Europe, but a mandate boosting our negotiating strength for reaching a sustainable deal.” That said, it is difficult to imagine how Greece could reject the Troika’s demands for reform and yet remain part of the euro zone. I certainly understand why Mr. Tsipras would like to hope that this is possible, but once again, he appears to have significantly overestimated his country’s bargaining position. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What Greece’s Imminent Debt Default Means for Canadian Mortgage Rates – Monday Morning Interest Rate Update (June 29, 2015)

by Dave Larock

Mortgage Rate ConceptIt took longer than many people expected but it now appears likely that Greece will begin to default on its loan repayment obligations tomorrow (June 30).

This is the day that Greece is required to repay a loan of €1.5 billion to the International Monetary Fund (IMF). After failing to agree to the reforms required by its creditors for another extension of its existing repayment terms, the country must either pay up, which it can’t, or default. In anticipation of this default, the European Central Bank (ECB) has just cut off Greece’s access to further funds from its Emergency Liquidity Assistance (ELA) facility, which had pumped an estimated €1 billion into Greek banks since the start of this year and had basically kept Greece’s financial system afloat during that period.

In anticipation of the coming chaos, the Greek government has just told the banks to stay closed until July 7. In the meantime, they will hold a national referendum on July 5 to ask voters to decide whether to accept new bailout terms from its creditors and to agree to the additional austerity measures that will accompany them or to default and turn their backs on the euro zone. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the U.S. Federal Reserve’s Current Economic View Means for Canadian Mortgage Rates – Monday Morning Interest Rate Update (June 22, 2015)

by Dave Larock

Mortgage Rate ConceptInvestors held their collective breath last Wednesday as they waited to learn whether the U.S. Federal Reserve would raise its short-term policy rate (called the “funds rate”) above 0% for the first time since December 2008.

The Fed funds rate is the single most important interest rate in the global economy. It is the Fed’s main monetary policy tool for controlling U.S. inflation and growth rates because it serves as the base rate on which all other U.S. interest rates are priced, either directly or indirectly.

Given that the Fed funds rate has a profound influence over the U.S. economy, which, along with China, has been the world’s main economic growth engine for decades, and given that bond yields in many other countries are significantly influenced by U.S. bond yields, any change in the Fed funds rate initiates a cascading impact that permeates throughout the global economy.

This impact is keenly felt in Canada, where our Government of Canada (GoC) bond yields have moved in lock step with their equivalent U.S. treasury yields since the start of the Great Recession. This is why anyone keeping an eye on Canadian fixed mortgage rates should keep a watchful eye on the Fed’s policy guidance.

The continued improvement in U.S. economic data has convinced many investors that the Fed will finally start raising its funds rate at some point in 2015 and the Fed has, at times, helped foster this view through its carefully worded ongoing commentary. But does the Fed really want to raise rates, or does it just want to plant enough concern in investor’s minds to dissuade them from making risky, speculative bets based on a lower-for-longer view that might ultimately threaten the stability of the U.S. financial system? After all, this isn’t the first time since 2008 that markets have expected the Fed to raise the funds rate, and each time, at the eleventh hour, the Fed has stayed its hand and instead, adjusted the targets it uses to determine when monetary policy tightening will be appropriate. (The Fed is not only in charge of the interest-rate ball … it also owns the goal posts.)

Again last week, the Fed left its funds rate unchanged, and when I read Fed Chair Yellen’s most recent post-meeting press conference commentary I continued to find plenty of hints that the Fed has no plans to raise its funds rate for as long as it can delay and still maintain its credibility.

Here are some examples of Fed Chair Yellen’s comments that lead me to that view (with my comments in italics): read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What Keeps the Bank of Canada Up at Night – Monday Morning Interest Rate Update (June 15, 2015)

by Dave Larock

Mortgage Rate ConceptLast week the Bank of Canada (BoC) issued its latest biannual Financial System Review (FSR), which gives us a summary of where the Bank sees “the main vulnerabilities and risks to the stability of the Canadian financial system”.

The FSR should be of interest to anyone keeping an eye on mortgage rates because it highlights the potential weaknesses in our financial system that could ultimately lead to changes in the BoC’s monetary policy, and potentially fuel a rise in bond market volatility that would trigger higher borrowing costs, if left unchecked.

This particular FSR report was even more relevant to Canadian mortgagors because two of the BoC’s three biggest areas of concern relate directly to residential mortgage borrowing. Specifically, the Bank’s top three worries are:

  • Overall levels of household indebtedness
  • Overvaluation in key Canadian housing markets
  • Illiquidity in fixed-income markets and investor risk taking

Today’s post will provide a summary of these risks and a detailed explanation of the overlapping vulnerabilities that could exacerbate them (and in so doing, affect our mortgage rates). read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Bank of Canada Wants the US to Raise Its Policy Rate – When Will This Happen? Monday Morning Interest Rate Update (June 8, 2015)

by Dave Larock

Mortgage Rate ConceptNo one would be happier than the Bank of Canada (BoC) to see the U.S. Federal Reserve raise its short-term policy rate (often referred to as the U.S. federal funds rate). Here’s why:

  • The BoC is concerned about our slowing economic momentum, which was confirmed most recently by our weaker-than-expected first-quarter GDP decline of 0.60%. Despite this, the BoC is reluctant to cut its overnight rate in order to stimulate our economy because it is also concerned about our record-high household debt levels, which it has long called the “biggest risk” to our domestic financial stability.
  • If the U.S. Fed raises its short-term policy rate and the BoC leaves its equivalent overnight rate unchanged, the Loonie will weaken against the Greenback. This will give our exporters a competitive boost in U.S. markets, where about 80% of our total exports are sold.
  • While Canadian monetary policy is tightly linked to U.S. monetary policy, right now our overnight rate stands at 0.75%, while the Fed funds rate hovers in the 0% to .25% range. That gives the BoC a buffer where the U.S. Fed can raise its policy rate without compelling the BoC to do the same.

For these reasons, a rate hike by the U.S. Fed would hit the sweet spot for the BoC because it would give a boost to our exporters while not impacting the appetite of Canadian consumers for more credit. Of course, none of this matters to the Fed, which will operate on its own timetable when deciding on when to begin tightening U.S. monetary policy. The BoC can only hope that it will do so sooner rather than later.

Which brings us to the question that is on everyone’s mind these days: When will the Fed finally decide to raise its policy rate?

Today’s consensus view is that the Fed will begin to tighten U.S. monetary policy at some point this year. The Fed holds press conferences after its June and September meetings but not after its July and October meetings, and most industry watchers expect the Fed to raise its policy rate at a meeting that includes a press conference. As such, the betting right now is on September … if the Fed does end up moving this year.

Here are the arguments for and against the Fed tightening its monetary policy soon: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Bank of Canada Serves Up Its Latest Economic View With A Dash of Hope Sprinkled On Top – Monday Morning Interest Rate Update (June 1, 2015)

by Dave Larock

Mortgage Rate ConceptLast week the Bank of Canada (BoC) announced that it would leave its overnight rate unchanged, as was almost universally expected. This matters to anyone in the market for a mortgage because all of our variable and fixed mortgage rates are priced either directly or indirectly on the overnight rate.

The BoC also offered its latest insights into how both the Canadian and U.S. economies are progressing. Here are my five key highlights from that statement: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Will the Latest Inflation Data Impact the Bank of Canada’s Monetary Policy? Monday Morning Interest Rate Update (May 25, 2015)

by Dave Larock

Mortgage Rate ConceptStatistics Canada released its latest inflation data last Friday and it showed our Consumer Price Index (CPI) growth slowing to 0.80% in April (as compared to 1.2% in March). Not surprisingly, this slowdown in year-over-year inflation was led by another 13.5% drop in energy prices, which followed a 10.4% decline for that category in March.

Stats Can also provides us with a more refined measure of inflation, which strips out volatile CPI inputs like food and energy, called core inflation, and momentum in this category also slowed to 2.3% in April (as compared to 2.4% in March).

The CPI data act as important gauges for anyone keeping an eye on Canadian mortgage rates because the Bank of Canada (BoC) will adjust its overnight rate, on which both of our variable and fixed mortgage rates are either directly or indirectly priced, to ensure that our economy maintains overall price stability.

With that in mind, here are my key takeaways from the latest CPI data, along with some other related thoughts as we look toward the BoC’s next policy-rate announcement this Wednesday: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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