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.
Monetary policy provides a powerful tool for our central bankers to use during tough times.
Lowering short-term policy rates helps to stimulate economic growth, and central-bank balance sheets can be used for myriad purposes, which include restoring market liquidity and influencing or even outright manipulating longer-term bond yields and borrowing rates. But, human nature being what it is, over time, that blessing became a curse. The ability to do something seems to have made our central bankers forget that sometimes the best option is to do nothing.
The US Federal Reserve raised its policy rate by another 0.75% last week, and, as I predicted in last week’s post, it also surprised financial markets with a very hawkish warning that more monetary-policy tightening is both needed and imminent.
Let’s start with a quick look at the highlights from the Fed’s latest communications before considering the implications for Canadian mortgage rates:
The bond futures market is pricing in a 0.75% hike on Wednesday, with two more 0.50% increases expected in October and November.
Those bets were raised after the release of last week’s US inflation data. While it showed that headline inflation fell in August, from 8.5% to 8.3% on a year-over-year basis, that was less of a decline than the market had expected. More concerningly, US core inflation, which strips out the most volatile prices like food and energy, increased from 5.9% in July to 6.3% in August.
As in Canada, US inflation is broadening out even as the overall headline number starts to decline. But right now, the Fed is in a tougher spot than the Bank of Canada (BoC).
The Bank of Canada (BoC) raised its policy rate by 0.75% last Wednesday, and that means our variable-rate mortgages and home-equity lines-of-credit will increase by the same amount in short order.
The increase was in line with the consensus forecast, and as such, the Government of Canada (GoC) bond yields which our fixed mortgage rates are priced on held steady.
At least for now.
All eyes will be on the Bank of Canada (BoC) when it meets this week.
The Bank is expected to hike its policy rate by between 0.50% and 0.75%, and variable mortgage rates will be raised by the same amount shortly thereafter.
Our fixed mortgage rates, which move in the same direction as Government of Canada (GoC) bond yields, won’t be directly affected by the BoC’s policy-rate change, but they could be indirectly impacted if the Bank’s accompanying statement has a tone that is different from what is anticipated.
Our bond markets and our central banks are not on the same page right now.
Both the US Federal Reserve (the Fed) and the Bank of Canada (BoC) are adamant that they will continue raising their policy rates until inflation and inflation expectations are brought to heel, and they have recently hinted that this will require more hikes than the market is currently pricing in.
Our central bankers concede that this will create economic pain, but they believe that pain will pale in comparison to the pain that will occur if inflation is left unchecked – and they continue to predict that they can pull off a soft-landing for our economies while all of this transpires.