Confusion reigns right now about what will happen with mortgage interest rates. Will they go up or not?
On one hand, we see the Bank of Canada confirm that it has no plans to raise short-term rates until next year. On the other hand, we see bond traders pushing up longer term fixed interest rates.
We are left to wonder which side is most reflective of the long-term trend and how should mortgage shoppers position accordingly. But let’s have a clear understanding of the two primary entities that control the direction of mortgages rates.
The Bank of Canada’s monetary policies directly impact short-term rates such as lines of credit, variable and one-year fixed terms.
The bond market is more important for influencing long-term rates such as the five- or 10-year fixed terms.
The Bank of Canada sets interest rates based on where it believes inflation is headed 18 to 24 months from now.
Its position for now is inflation in Canada remains subdued so as long as inflation remains in check and there is significant slack in the economy (household debt does not get out of control), the current rates will remain appropriate. Rate increases, when they do finally arrive, will likely be gradual and just enough to keep inflation in check. The Bank of Canada’s target inflation rate is two per cent.
For those of you with a variable rate mortgage or line of credit, this is comforting to hear.
The bond that everyone in the mortgage industry watches is the five-year Government of Canada Bond. Prices and yields have an inverse relationship. If one goes up, the other goes down and vice versa.
The yield has jumped to a new two year high as of late, causing fixed mortgage rates to escalate quickly. There are several reasons why traders have been selling bonds and pushing up the long-term rates.
Positive economic momentum continues down south, which many feel could accelerate our GDP and spark inflation concerns. Continued outflows from global bond markets and the weakening loonie makes holding Canadian bonds less attractive.
Despite the technical damage currently being done to the bond market, there’s a cold reality in today’s rate environment.
Economic growth and inflation are significantly under-performing expectations, so the Bank of Canada isn’t about to raise rates until that situation reverses.
The recent long-term rate increases act as economic brakes, reducing the need for further rate hikes. But all it takes is one global crisis to reverse the upswing in yields.
Absolutely nothing at this point suggests a persistent growth rate much above two per cent so as long as the GDP is stuck in a below two per cent growth rut, inflation will likely remain at or below that range. With that backdrop, future rate increases could be moderate and/or be short-term in duration.