Monday Morning Interest Rate Update – Will Spiking US Inflation Lead to Higher Canadian Mortgage Rates?
August 18, 2025
Weak Economic Data Lead to Increased Rate Cut Bets
September 2, 2025
Canadian inflation: Last Tuesday Statistics Canada confirmed that our Consumer Price Index (CPI) declined from 1.9% in June to 1.7% in July on a year-over-year basis, lower than the consensus forecast of 1.8%.
The Bank of Canada’s (BoC) key gauges for core inflation also eased a little last month.
Overall, the latest inflation data point to a gradual easing of inflation pressure as our economy continues to slow.
US rate cuts: Last Friday in a speech at the Jackson Hole symposium, where central bankers gather to rub elbows every year, US Federal Reserve Chairman Jerome Powell indicated that rate cuts may be on the horizon.
Specifically, he assessed that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
While a Fed rate cut now appears inevitable, I am not convinced that many more will follow, or that bond-market investors will respond in typical fashion by lowering longer-term US Treasury yields.
As I wrote in last week’s post, the upward pressure on US inflation has come mostly from service prices. The inflationary impact of tariffs on US goods prices has lagged thus far for several reasons, but it is expected to intensify over the near term.
At the same time, rampant deficit spending by the US federal government remains a steady source of US inflation pressure, and bond-market investors have taken note.
The Latest on Mortgage Rates
Government of Canada (GoC) bond yields followed their US Treasury equivalents lower at the end of last week as bond-market investors responded to Fed Chair Powell’s dovish Jackson Hole speech.
That said, the bond market’s reaction was relatively muted. The slight drop in GoC bond yields wasn’t material enough to lead to changes in the fixed mortgage rates that are priced on them.
Bond-market investors are still reacting more strongly to negative market news. For that reason, I think bond yields, and therefore our fixed mortgage rates, will retain their upward bias for the time being.
Variable-rate discounts were unchanged once again last week.
Our softer-than-expected inflation data didn’t have much impact on the bond-future market’s expectations of a BoC rate cut at its next meeting on September 17. The odds of a cut at its next meeting are holding steady at about 40%.
That said, both our job market and economy are now showing clear signs of slowing. I remain convinced that a stimulative policy rate will be needed at some point (which would require the BoC to cut by another 0.75% in total).
If our inflation continues to cool, it will give the BoC leeway to focus on supporting economic growth, as it pledged to do under those circumstances in its most recent policy statement.
Insider’s Tip for Borrowers
The GTA real-estate market activity has picked up lately, and a lot of first-time buyers are moving off the sidelines.
If you count yourself among that group, here are my 13 guideposts for every first-time buyer.
That post provides a summary of my best advice after twenty-five years of working extensively with this buyer group.
Mortgage Selection Advice
My mortgage selection advice is unchanged from last week.
Fixed rates have returned to their long-term average levels. The term premium, which is the additional cost that borrowers must pay to lock in for longer terms, is slowly being restored as our bond-yield curve continues to normalize.
Right now, the best available three- and five-year fixed rates are both good options. If the rates are roughly equal, I think five-year fixed-rate terms offer slightly better value.
I continue to believe that today’s variable mortgage rates will likely produce the lowest borrowing cost over their full term, even now that the consensus believes additional BoC rate cuts will take longer than expected.
Anyone choosing a variable rate should do so only if they can live with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and, in some cases, higher payments) should my forecast prove incorrect.
Three Posts Every New Visitor to My Blog Should Read
This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages.
This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender. A lower penalty can save borrowers thousands of dollars if rates drop.
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract.