Dave Larock in Interest Rate Update, Mortgages and Finances
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The Canadian economy added an estimated 55,000 new jobs in May, which was more than three times the forecast of 15,000 new jobs that the consensus had been expecting.
This impressive job growth was an encouraging sign that the surge in our first-quarter GDP has stimulated momentum in our broader economy. Interestingly, and somewhat confoundingly, that momentum still hasn’t fueled any meaningful increase in our average wage growth - so while willing Canadians are working, they aren’t seeing an increase in their purchasing power.
Here are five key highlights from the latest Canadian employment data (for May):
Another strong month of job creation begs the obvious question: Does this increase the likelihood that the BoC will raise rates?
Bluntly put, over the short term, I don’t think so.
When the BoC increases its policy rate, the Loonie would be expected to appreciate against a basket of other currencies. In the current environment, that would exacerbate the “competitiveness challenges” that our exporters already face, challenges that the Bank has been highlighting for some time now.
Furthermore, with all of our inflation measures still comfortably below the BoC’s 2% target, along with another round of mortgage rule changes to address concerns about household indebtedness and rising house prices in hot regional markets, the Bank can afford to maintain its accommodative monetary policy for some time yet.
Five-year Government of Canada bond yields rose three basis points last week, closing at 0.96% on Friday. Five-year fixed-rate mortgages are available at rates as low as 2.19% for high-ratio buyers, and at rates as low as 2.24% for low-ratio buyers, depending on the size of their down payment and the purchase price of the property. Meanwhile, borrowers who are looking to refinance should be able to find five-year fixed rates in the 2.59% to 2.69% range.
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 0.70% (2.00% today) for low-ratio buyers, again depending on the size of their down payment and the purchase price of the property. Borrowers who are looking to refinance should be able to find five-year variable rates around the prime minus 0.40% to 0.45% range, which works out to between 2.20% and 2.25% using today’s prime rate of 2.70%.
The Bottom Line: We posted another month of impressive job growth in May, providing confirmation that our strong first-quarter GDP growth is feeding into the broader economy. That said, this rise in employment is still not translating into income growth because average wages actually fell by 0.1% last month. The BoC can afford to keep its policy rate at today’s ultra-low levels for as long as labour costs remain under control, but if our run of impressive job growth continues it will eventually start pushing average wages higher, and when that happens, the BoC will feel more compelled to raise rates. 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