Dave Larock in Interest Rate Update, Mortgages and Finances
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Last week we received the latest Canadian and U.S. employment reports and they continued to confound market watchers.
The unemployment rates in both countries are at levels that should be pushing average incomes higher as the demand for labour outstrips its supply. When that happens, employers are typically compelled to raise compensation in order to attract workers - and since the cost of labour has a pervasive impact on prices across the economy, this increases overall inflation.
But that isn’t happening. Instead, low unemployment levels in both countries have corresponded with wage increases that are hovering close to the overall level of price inflation, and this leaves policy makers with a conundrum.
If low unemployment is a signal that wage inflation is imminent, then they should start raising interest rates soon to avoid falling behind the curve and having to increase them more sharply later (which risks tipping an economy into a recession). But if the unemployment rate is no longer a reliable indicator of the labour market’s health, then policy-rate increases will be premature and could stifle hard-won economic momentum.
Before we examine this question in more detail, let’s take a quick look at the highlights from the latest employment data:
U.S Non-Farm Employment Report (March)
Canadian Labour Force Survey (March)
While the degrees of difference vary, the fundamental disconnect between U.S. and Canadian unemployment rates and the growth rates of average incomes in the economies of both countries continue to confound experts.
Here are a couple of points that help explain why this is occurring:
The U.S. Federal Reserve recently decided that overall unemployment has fallen to a level where the risk of higher inflation now outweighs the risk that monetary-policy tightening will stifle U.S. economic momentum, and it has now raised its policy rate twice in response.
Meanwhile, the Bank of Canada (BoC) has remained more cautious and is looking for more convincing economic data before following the Fed’s lead. That said, Canada’s broader economic data have been on an impressive run of late, and if that continues it may force the BoC to raise its overnight rate more quickly than planned.
Five-year Government of Canada bond yields held steady last week, closing at 1.12% again on Friday. Five-year fixed-rate mortgages are available at rates as low as 2.44% for high-ratio buyers, and at rates as low as 2.49% for low-ratio buyers. If you are looking to refinance, you should be able to find five-year fixed rates in the 2.64% to 2.79% range, depending on the terms and conditions that are important to you.
Five-year variable-rate mortgages are available at rates as low as prime minus 0.80% (1.90% today) for high-ratio buyers, and at rates as low as prime minus 0.60% (2.10% today) for low-ratio buyers. If you are looking to refinance, you should be able to find five-year variable rates in the prime minus 0.45% range (2.25% today), depending on the terms and conditions that are important to you.
The Bottom Line: Our recent run of stronger-than-expected economic data makes it perfect timing for the release of the BoC’s latest Monetary Policy Report (MPR), which is due out this Wednesday. The MPR gives us the Bank’s comprehensive view on the state of our economy, and we’ll be reading that for any signs that the BoC might be contemplating an acceleration of its rate-hike timetable. Stay tuned.
David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave