Why Are Canadian Mortgage Rates Rising?November 23, 2015
What the Bank of Canada’s Latest Economic Assessment Means for Our Mortgage RatesDecember 7, 2015
The Bank of Canada (BoC) will issue its latest policy statement this Wednesday. It summarizes the Bank’s current assessment of our economy and offers us valuable insight into how the BoC is likely to direct its monetary policy over the short and medium term.
These statements have given our variable-rate borrowers comfort for some time now because the BoC’s carefully crafted words have reassured them that the Bank has no intention of raising its overnight rate, on which our variable-rate mortgages are priced, any time soon. Canadian bond-market investors also listen carefully to the BoC’s pronouncements since any change in the BoC’s monetary-policy bias is likely to affect bond yields, on which our fixed-rate mortgages are priced.
The BoC’s upcoming policy announcement is of particular importance because it comes just ahead of what is expected to be the first policy-rate rise by the U.S. Federal Reserve in almost a decade, and because the Canadian economy has shown some encouraging signs of late, in spite of our energy-sector challenges.
To be clear, while no one expects the BoC to start talking about overnight rate increases, the Bank may replace its dovishly themed language with more neutral phrasing, and even that incremental shift could push bond yields higher and buoy the Loonie. To that end, here are five key areas that I expect the Bank to touch on, along with my take on what market watchers will be looking for in each case:
- The current health of our labour market – Our economy generated 44,000 new jobs in October and we have now averaged 23,000 new jobs/month over the most recent six months. Average wages have increased by 3.1% over the past year and that’s well above our average inflation rate of 1% over the same period, so the purchasing power of the average Canadian has been expanding nicely. The key question market watchers want answered is: Does the BoC think that this momentum in our overall employment market is sustainable, even in light of the slowdown in our vital energy sector? And given that the cost of labour has a pervasive influence on our inflation rate: Is the BoC concerned that rising average wages will lead to greater inflationary pressures?
- The risk of higher inflation – The BoC has focused its monetary policy on promoting overall economic growth and helping our employment markets return to health, but last I checked, its primary mandate was still to ensure price stability. Our core-inflation rate has remained stubbornly above the BoC’s 2% target for more than a year now, and while the Bank has attributed this to transitory factors that have largely been a by-product of the weaker Loonie, the longer these inflation levels remain elevated, the harder it is for the BoC to dismiss them as temporary phenomena. If the cost of labour continues to rise at a rate of 3%+, this will push our inflation rate higher still and may force the Bank to turn its focus back to price stability before it otherwise would. Market watchers will be looking for the BoC to acknowledge our above-target core inflation rate, and more importantly, for any signs that the Bank will alter its monetary-policy plans to rein it in.
- The impact of the U.S. Fed’s first policy-rate increase in almost of decade – Many investors are still concerned that the U.S. Fed’s impending rate increase could cause global economic instability as hot money flows out of emerging markets, and in so doing, destabilizes them. Closer to home, a rate increase by the U.S. Fed could cause the Greenback to surge higher against the Loonie. While the BoC has acknowledged that the cheaper Loonie has given our beleaguered export-manufacturing sector a much-need tailwind, if this currency swing gets too wide it can have a destabilizing impact and create a headwind for our economy instead (by making our imports prohibitively expensive). Market watchers will be interested in the BoC’s take on the global impact of the Fed’s first rate policy-rate increase since June 2006, and closer to home, will be watching for any signs that the Bank has concerns about further depreciation of the Loonie.
- The sustainability of our current manufacturing-sector rebound – The BoC has repeatedly said that any sustainable Canadian economic recovery must be underpinned by the return to health of our manufacturing sector, and that was before oil prices plummeted and our energy sector was flipped on its back. The benefits of the cheaper Loonie have been slow to accrue for our manufacturers and while we have at long last seen some improvement in our manufacturing-related data over the most recent few months, we haven’t seen enough yet to confirm whether these are blips or signs of an encouraging trend. Market watchers will be looking to see if the BoC expresses increased confidence in the recent uptick in the manufacturing-sector related data.
- The impact of sharply lower energy prices on Alberta’s economy – Alberta has lost approximately 63,000 jobs so far in 2015 and average wages have fallen by 2.6% over the past twelve months. These trends will be of particular concern to the BoC because until this year, Alberta has led the country in new-job creation while also creating the highest paying new jobs. Bluntly put, Alberta’s oil sector was Canada’s main job-creation engine before the price of oil dropped more than 50% from its high. Market watchers will be keen to hear the BoC’s assessment of how Alberta is transitioning to a world where oil is selling for around $40 a barrel.
Five-year Government of Canada bond yields fell by three basis points last week, closing at 0.91% on Friday. Five-year fixed-mortgage rates are available in the 2.54% to 2.69% range and five-year pre-approval rates are offered at 2.79%.
Five-year variable-mortgage rates are available in in the prime minus 0.50% to prime minus 0.40% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.
The Bottom Line: The BoC is not expected to raise its overnight rate when it meets next week but our modestly improving economic data suggest that the Bank may alter the dovish tone that it has used in its monetary-policy guidance of late. If this meeting marks a shift back to more neutral monetary-policy language, we may see a small rise in bond yields that could push our fixed mortgage rates marginally higher over the short term. Stay tuned.