David Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News
Bank of Canada (BoC) Governor Mark Carney has made it clear that he wants to raise interest rates but the economic data are not co-operating.
We saw the latest example on Friday of last week when Statistics Canada released its July Consumer Price Index (CPI) which showed price inflation of only 1.3% over the most recent twelve months. That was lower than the BoC’s 1.6% forecast for the month and remains well below the Bank’s target inflation rate of 2%.
Interestingly, in the latest Bank of Canada Review, published last Wednesday, there is an essay titled “Measurement Bias in the Canadian Consumer Price Index: An Update” which concludes that the CPI probably overstates our inflation by about .5%. Thus, one could argue that our real rate of inflation is now below 1%.
So while Governor Carney continues to try to reign in borrowers with warnings about higher rates, his words continue to ring hollow with many informed observers.
Here are five factors that are contributing to the consensus view that rates aren’t going anywhere until at least 2013:
Against this economic backdrop, it continues to feel as though Governor Carney is warning us about gettin
g a sunburn in the middle of a rain storm. Given that, I think his actions will continue to contradict his words.
Government of Canada (GoC) five-year bond yields were 14 basis points higher for the week, closing at 1.50% on Friday. Several lenders raised their rates last week and market five-year fixed rates are now back above 3%.
Borrowers considering a variable-rate mortgage still don’t have much of a margin of safety with five-year variabl
e rates (2.75%) priced so close to five-year fixed-rates (3.04%). That’s why I continue to believe that anyone looking to the short end of the interest-rate curve for some interest-cost savings would be better served to consider a one-year fixed rate (2.49%) as an alternative.
The Bottom Line: While most macro-economic indicators imply that interest rates will stay low for the foreseeable future, there is no denying that the current momentum in GoC bond yields could push fixed-mortgage rates somewhat higher over the short-term. If you are in the market for a mortgage, it would be wise to lock in a pre-approval rate now in case the current trend continues.
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 (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave