Canadian Inflation Surges Higher Again. Are Mortgage Rates Next? Monday Interest Rate Update (June 23, 2014)

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.

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Our inflation rates continue to rise more quickly than the Bank of Canada (BoC) and most market watchers have been forecasting. Last Friday, Statistics Canada released the latest Consumer Price Index (CPI) for May, and once again it showed average prices surging higher.

Overall inflation rose 2.3% in May, after rising to 2.0% in April, which marked the first time overall CPI had returned to the BoC’s inflation target since April 2012. BoC Governor Poloz had warned us that the April CPI data would be higher, but he attributed this rise to higher energy prices and predicted that they would prove transitory.

Energy prices once again led the charge in May, surging 8.4% on a year-over-year basis, but last month’s price rises were more broadly based. Core inflation, a more refined number that strips out more volatile CPI inputs like food and energy, also rose sharply from 1.4% to 1.7%.

Some of this increase in average prices can be explained by the cheaper Loonie, which makes our imports more expensive at the same time as it makes our exports less so. But retail sales were also strong in April so a rise in consumer demand may be adding some fuel to our inflationary fire.

The key concern for mortgage borrowers is how this will affect the timing of future BoC rate increases.

Over the near term, I expect very little. The Bank continues to focus its attention on overall economic momentum and growth, and more specifically, on the return to health of our employment market. Inflation may be on the uptick but core inflation is still a little under the BoC’s target, and the Bank has said that it will tolerate above-target inflation over the short-term if warranted by overall circumstances.

Furthermore, the market is already providing a counterbalance to rising inflation, effectively doing some of the BoC’s job for it. When the latest CPI came in higher than expected on Friday, our dollar rose by 0.60 of a cent. Investors bought up the Loonie in the belief that the BoC will raise rates more quickly than expected in future, and interestingly, by doing so, they incrementally reduced the cost of our imports and relieved some inflationary pressure in the process.

When investors believed that the BoC was genuinely worried about falling prices, they priced in the possibility that the Bank’s next move might be a rate cut. They sold off the Loonie and that gave our export manufacturers a competitive boost in the bargain. But the latest inflation data should eliminate the BoC’s disinflation fears and the prospect of a rate cut over the short run, and it will be interesting to see whether the Bank reflects this in its next Monetary Policy Report, which will be released in mid-July.

Five-year Government of Canada bond yields rose two basis points last week, closing at 1.60% on Friday. Five-year fixed-rate mortgages are available in the 2.84% to 2.99% range, and five-year fixed-rate pre-approvals are offered at rates as low as 2.99%.

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%. Well-qualified borrowers who know where to look may even be able to do a little better than that.

The Bottom Line: Energy prices continue to lead the short-term surge in the CPI that we saw continue in May but this type of inflation generally proves transitory over time. Given that, I don’t think the current spike in prices will accelerate the timing of the BoC’s next overnight rate increase, at least for now. It will, however, test the credibility of BoC Governor Stephen Poloz, who will now have a much tougher time talking down the Loonie with more rate-cut speculation based on fears of disinflation.

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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