Monday Morning Interest Rate Update (July 11, 2011)

David Larock in Mortgages and Finance, Home Buying, Home Selling

Mortgage Rate Chart (July 11, 2011) All eyes were on last Friday’s employment report after our latest Consumer Price Index (for May) came in higher than expected at 3.7%. If rising prices are reinforced by strong job growth, it strengthens the case that inflation is picking up steam. So when the report showed 28,000 new jobs, which was about double what the street was expecting, why did five-year Government of Canada bond yields plummet by 10 basis points, instead of rise? 

Despite a strong headline number, the details in the jobs report weren’t impressive: only a quarter of the new jobs were for full-time employment, most of the net increase occurred in Alberta (six of ten provinces actually saw decline), almost all of the gains were in the service sector (where jobs tend to be lower-paying), and most of the increase was in the public sector (primarily involving temporary work on the 2011 census).

While hiring stats are important indicators of overall economic momentum, the real reason we watch the employment rate is to gauge whether labour is likely to become more expensive because this pervasive cost spreads throughout the economy and spurs broad-based price inflation. Our latest employment report showed average wages increasing by less than 2%, compared to an overall inflation rate of 3.7%. So the cost of labour is increasing more slowly than the general rise in prices, and workers (who are also consumers) have incomes that are not keeping pace with inflation.

Last week’s international news wasn’t much for inflationists to hang their hat on either. The U.S. employment report was just dismal, showing only 18,000 net new jobs in an economy ten times the size of ours. Then on Thursday the European Central Bank (ECB) decided to raise its short-term interest rate and signalled that a further increase would come in the fall. This was a highly controversial decision that many analysts fear will do more harm than good as it heaps still more suffering on the Eurozone’s most  vulnerable economies – a list which  includes Greece, Ireland, Portugal, Spain and Italy.

Five-year government of Canada bond yields endured another bumpy week. A strong upward surge in yields on Thursday was offset by a downward surge on Friday and we finished the week with yields down 10 basis points overall. While the major banks hiked mortgage rates, several lenders held tight and as a result, five-year fixed-rate mortgages can still be had for a little under 3.7%.

Borrowers interested in a variable-rate mortgage saw the Mortgage Qualifying Rate (MQR), which is calculated using the posted rates at Canada’s six largest banks, increase back to 5.54%. That makes it tougher for borrowers to qualify with down payments of less than 20%; but borrowers who can come up with at least that amount have more flexibility because some lenders will use qualifying rates as low as 3.74% for conventional loans.  

The bottom line: When last week’s employment report is weighed in combination with the Bank of Canada’s projected second-quarter growth rate in the sub-2% range, the threat of short-term inflation (and therefore higher mortgage rates) still appears limited.

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David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog ( and on his own blog Email Dave

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