Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.
When Statistics Canada released its latest Consumer Price Index (CPI) report last Friday, it showed that prices have risen by 2% over the most recent twelve months, hitting the Bank of Canada's (BoC) long-term target for inflation for the first time since April of 2012.
Anyone keeping an eye on where mortgage rates may be headed is well advised to pay attention to the monthly CPI data, which measures the rate at which our average prices are increasing on a year-over-year basis.
The April CPI data begs the question; Are we witnessing the first signs of an uptrend in inflation that will begin to push mortgage rates inexorably higher as so many prognosticators have long been warning? Or is this recent inflation surge just a temporary spike caused by isolated factors?
The answer is important for mortgage borrowers because if inflation is expected to increase more quickly than previously believed, Canadian bond investors will demand higher yields to preserve their expected returns, and this will cause fixed-mortgage rates to rise. If inflation runs above the BoC’s target rate of 2% for an extended period, the Bank would also be expected to raise its overnight rate to increase short-term borrowing costs in an effort to slow the inflation rise, and this would push variable mortgage rates higher.
Let’s take a look at the highlights from the latest CPI data to try to answer this key question:
In summary, our recent rise in inflation has been almost entirely fuelled (pun intended) by surging energy prices. Core inflation, a more refined number that strips out more volatile CPI inputs like food and energy, only rose by 1.4% in April on a year-over-year basis – and it remains very much within its average range over the last couple of years.
Interestingly, BoC Governor Poloz warned recently that we would see a spike in inflation caused by higher energy prices, but added that he expected the impact to only be only transitory, presumably in an attempt to prevent any market overreaction to the most recent data.
So the good news is that the return of our overall inflation rate to the BoC’s target rate of 2% is not being interpreted as a signal that higher mortgage rates are imminent. The bad news is that any prospects of a near-term rate cut by the BoC are now almost certainly off the table (although this always seemed to be a remote prospect anyway, at least from my desk.)
Five-year Government of Canada bond yields rose three basis points last week, closing at 1.57% on Friday. Five-year fixed-rate mortgages are being offered in the 2.84% to 2.99% range and several lenders dropped their rates below 3% last week to enter the spring-market fray, so competition for this business is heating up. Five-year fixed-rate pre-approvals are still offered in the 3.09% range.
Five-year variable-rate mortgages are available in the prime minus 0.65% range, which works out to 2.35% using today’s prime rate of 3.00%.
The Bottom Line: The latest inflation data caught the market’s attention because it marks the first time in two years that overall inflation returned to the BoC’s target rate of 2%, but for the reasons listed above, it has not altered interest-rate expectations. That said, the next BoC Policy Rate announcement is around the corner and I’ll be going over that with my usual fine toothed comb in search of any indications to the contrary.
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