Mortgage Video Links: The Variable-Rate Mortgage and Sub-Prime Lending in CanadaMay 19, 2015
The Bank of Canada Serves Up Its Latest Economic View With A Dash of Hope Sprinkled On TopJune 1, 2015
Statistics 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:
- When our core inflation rate jumped from 2.1% in February to 2.4% in March, the BoC predicted that this spike would prove temporary because it was primarily caused by the “pass-through effects of the lower Canadian dollar”. The April drop in core inflation growth supports that view.
- The inflating impact of the cheaper Loonie, which makes our imports more expensive, is being roughly offset by the deflating impact of lower energy costs. Interestingly, seven of the eight components that comprise our CPI rose last month, showing the pervasive impact that a falling currency can have on prices, while falling energy prices caused the transportation component of our CPI to plummet, reminding us of how important energy is to our overall inflation momentum.
- BoC Governor Poloz predicted that the negative impacts of sharply lower energy prices would be “front loaded”, and while we saw energy-related businesses cut back on their investment spending quickly in response to the oil-price drop, in a speech last week he acknowledged that we have yet to see a significant follow-through impact on energy-related employment. That said, no one doubts that this is coming, and the as-yet-unknown impact of this imminent broadside to our economic momentum must hang over the BoC’s planning meetings like the sword of Damocles.
- The BoC’s most recent official forecast predicted that our output gap would close, returning our economy to full capacity, by the end of 2016. As a reminder, the output gap is the difference between our actual output and our maximum potential output, and interest rates would normally be expected to rise at or about the time when the output gap closes. This forecast looks increasingly tenuous when you combine the recent weakness in our job market with the fact that so much of our employment-growth momentum since the start of the Great Recession has been underpinned by Alberta’s steady demand for labour.
- The BoC has repeatedly said that it will lag the U.S. Federal Reserve on the timing of its next policy-rate increase. Last Friday, Fed Chair Janet Yellen said that it will start to raise rates “at some point” this year if the U.S. economy continues to improve as expected, but she hastened to add that the Fed will remain “cautious” and that the process of tightening U.S. monetary policy back to more normal levels will take “several years” to complete. This makes it unlikely that the U.S. Fed will aggressively tighten its monetary policy, and in so doing, force the BoC’s hand by throwing the Canada/U.S. exchange rate off kilter.
The BoC is not expected to change its policy rate at its meeting this Wednesday, but its accompanying commentary will offer us valuable insight into how it sees our economy progressing as compared to its forecast. Keep in mind that the Bank’s crystal ball has had quite a rose-coloured tinge over the last several years, and as such, I expect that the Bank will emphasize “uncertainty” instead of “weakness”, as a way to soften its assessment of our current economic trajectory.
Five-year Government of Canada (GoC) bond yields rose by five basis points last week, closing at 1.05% 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 terms and conditions that are important to you.
The Bottom Line: The latest CPI inflation data lent support to the BoC’s view that last month’s spike in our core-inflation growth rate was caused by pass-through factors that would prove temporary. A more benign inflation rate allows the BoC to remain cautious on the timing of its next monetary policy move, and gives the Bank time to let the various impacts of the oil-price shock play out more fully. That approach implies that both our fixed and variable mortgage rates should remain at or near their current levels for some time to come.