Most forecasters expect the Bank of Canada (BoC) to hike its policy rate by another 0.25% when it meets this Wednesday.
The Bank will also issue its latest quarterly Monetary Policy Report (MPR), which will provide detailed assessments of current economic conditions both at home and abroad.
There is some speculation that the BoC may use this MPR to explain why it is pausing additional rate increases until it has taken time to observe the impacts of the ones it has already made. (For reference, the Bank’s current rate-hike cycle is already its sharpest on record.)
If you are trying to figure out where Canadian mortgage rates are headed, you should pay close attention to what happens in the US. Our fixed mortgage rates move in near lockstep with their US Treasury equivalents, and the Bank of Canada’s (BoC) policy rate moves in the same direction as the Fed funds rate over time (although not necessarily with equal precision).
The same is true in many other countries. The US dollar is the world’s reserve currency, and as such, the Fed funds rate is the base lending rate for a huge swath of other interest rates across the globe. Given that the Fed is laser focused on bringing down inflation and restoring price stability above all else, the US inflation releases contain the most closely watched data anywhere on the planet right now.
As per tradition, my first post of 2023 will offer some predictions and forecasts for the year ahead but first, some important qualifiers.
Forecasting is hard at the best of times, and these are not those.
Today we are living through a period of elevated volatility where myriad factors have the potential to substantially alter our economic trajectory over the next twelve months. They include:
- The sharpest monetary-policy tightening cycle in decades
- Russia’s invasion of Ukraine and the US/China trade war, both of which continue to intensify
- The global pandemic’s path, particularly in China where infection rates are still surging
Here are my five mortgage-related predictions for the year ahead.
I hope you had time to relax and recharge over the holiday season.
I will be back to my regular Monday Morning Updates next week, and in the meantime, here are links to five recent posts to get you caught up:
What a long, strange trip 2022 has been.
At the start of the year, who would have believed that we would now be happy to learn that Canadian and US inflation rates were holding steady at about 7%? Or that we would be relieved, after the sharpest increases on record, when the Bank of Canada (BoC) and the Fed hiked by only 0.50% at their final meetings of the year?
In its accompanying policy statement, the Bank indicated that any future rate hikes will be data dependent (instead of being largely predetermined, as has effectively been the case until now).
Here are my five key thoughts relating to the BoC’s latest policy-rate announcement and from Deputy Governor Sharon Kozicki’s speech and press conference Q & A last Thursday when she provided additional context for the Bank’s current thinking:
The Bank of Canada (BoC) is expected to raise its policy rate when it meets this Wednesday. The only real question still up for debate is whether it will hike by 0.25% or 0.50%.
Financial markets are pricing in a 0.25% increase, but I think a 0.50% hike makes more sense.
For starters, the BoC has repeatedly said that front-loading its rate hikes will magnify their impact, and by so doing, reduce the amount of total tightening that will ultimately be required. If the Bank expects that at least another 0.50% rise is needed, why spread that 0.50% over a longer period if that will reduce their ability to cool inflation?
Today’s post will explain how they work, assuage fears that they will trigger a US-style housing meltdown, and outline options for borrowers who are being impacted by them.
(It was a slow week for mortgage-rate news, but my Bottom Line at the end of this post will offer a quick update on where rates currently stand and my take on where they’re likely headed over the near term.)
Let’s start with some quick definitions.
Our headline Consumer Price Index (CPI) held steady at 6.9% on a year-over-year basis. The biggest contributors to last month’s inflation were higher mortgage rates and prices at the gas pump, and the most notable decelerations occurred in groceries and natural gas prices.
The headline US Consumer Price Index (CPI) increased by 7.7% on a year-over-year basis last month. That result was down from 8.2% in September and lower than the consensus forecast of 8%.
US core CPI, which strips out the most volatile inputs to overall CPI, such as food and energy prices, fell from 6.6% in September to 6.3% last month and came in lower than the consensus forecast of 6.5%.
The market reaction was euphoric. Stock markets surged higher and bond yields plunged in response. It was as if the inflation dragon lay slain on the steps of the New York stock exchange.
Last week was an eventful one for anyone keeping an eye on Canadian mortgage rates.
The US Federal Reserve announced another jumbo-sized rate hike, Statistics Canada released a blockbuster jobs report, and we saw a significant bond-yield rally replaced with a sharp sell-off.
Here is my take on those developments, along with a warning that we may be about to underestimate the stickiness of our current inflation pressures.
The Bank of Canada (BoC) raised its policy rate by 0.50% last week. This was the Bank’s sixth hike thus far in 2022, and its policy rate has now increased from 0.25% to 3.75% over that span.
The move surprised financial markets, which had priced in a 0.75% hike, and Government of Canada (GoC) bond yields plunged in the immediate aftermath as investors recalibrated their assumptions of when the BoC will pause and where rates will peak.
Last Wednesday we received the latest Canadian inflation data for September, and the results mirrored the US inflation data that were released the week before.
Our overall Consumer Price Index (CPI) dropped from 7% in August to 6.9% in September on a year-over-year basis, but that decline was less than expected. The consensus forecast had overall CPI falling to 6.7%.
US and Canadian bond yields continued their seemingly inexorable rise last week.
This time the catalyst was the latest US inflation data, for September, which came in higher than expected.
In today’s post I will outline the latest data and explain why they drove bond rates higher. Then I’ll share a few points to support the view that some meaningful inflation relief may finally be on the way before closing with my take on the implications for Canadian fixed and variable mortgage rates.
Let’s begin with a quick summary of the US inflation data for September:
I hope that you all enjoyed a happy Thanksgiving weekend.
There were several mortgage-related developments last week that were worth noting.
Here are my top five from that list.