The Bank of Canada Holds Steady (and Offers Some Reassurance)

 The Bank of Canada (BoC) held its policy rate steady last week, as expected.

At the Bank’s accompanying press conference, Governor Macklem noted that uncertainty is “unusually elevated”, that “there are many possible outcomes”, and that there is “no risk-free path” forward.

He expressed both a willingness to cut if the US enacts additional trade restrictions and to hike if higher energy prices cause “generalized inflation increases”.

The BoC remains in wait-and-see mode as events beyond its control play out, and that makes it difficult to offer much in the way of forward guidance. But the Bank’s latest communications still included several noteworthy observations:

• Governor Macklem assessed that there was “little evidence” of an inflation pass through from energy prices to other goods and services thus far.
• He noted that core inflation, which strips out food and energy prices, was “just above 2% in March” and that “the proportion of the components of the CPI basket rising faster than 3% has declined in recent months.” He also expressed confidence “longer-term inflation expectations remain anchored”.
• He noted that when the energy-price shock began, our economy had “some slack”, and inflation has been “close to target for roughly a year and a half”. Those factors give us more non-inflationary runway to absorb the impacts from the energy-price shock and reduce the likelihood that energy-price inflation will be rapidly passed through to other good and services.
• He observed that energy price shocks tend to be short lived and that rate hikes enacted to counteract their effects on broader inflation may not help, because their impacts occur with a lag.
• BoC Deputy Governor Carolyn Rogers assessed that, over the near term, the main risk was higher inflation tied to the Middle East conflict, but over the longer term, trade tensions “are the bigger threat”.

I thought the BoC’s commentary was dovish overall.

While it reassured financial markets that it would do what it must if higher energy prices are sustained long enough to fuel a broad-based inflation spike, it expressed confidence that our economy is still a long way from that point.

The Bank’s continued emphasis on trade uncertainty, which it assesses is the bigger threat to our economy over the longer term, bolsters my view that disinflationary risks will have more impact on the BoC’s medium-term policy-rate decisions.

The Latest on Mortgage Rates

Government of Canada bond yields increased last week alongside their US Treasury equivalents.

The US Federal Reserve held its policy rate steady last Wednesday and US bond-market investors are no longer pricing in any Fed cuts in 2026.

Canadian fixed mortgage rates held mostly steady.

Variable-rate discounts have widened a little of late in response to narrowing credit spreads.

Bond-market investors are back to pricing in between two and three 0.25% rate hikes by the BoC in 2026.

They seized on Governor Macklem’s comment that the BoC would consider “consecutive increases” if high energy prices lead to persistent broader inflation. They apparently put less emphasis on his accompanying assessments that there are no signs of cost push inflation this time, that our inflation pressure is currently narrowing, and that our economy has a substantial non-inflationary runway to absorb the energy-price shock.

My Take on Today’s Mortgage Options

My advice is unchanged from last week. Fixed rates are likely to remain volatile.

Three- and five-year fixed rates remain the most popular choices. If the spread between those two options is minimal, I think five-year fixed rates offer better value.

Most of the borrowers I am working with right now are opting for the stability of fixed rates, and I fully appreciate their appeal.

That said, the relative saving offered by today’s variable rates has increased now that spiking bond yields are putting significant near-term pressure on fixed mortgage rates.

I expect that variable mortgage rates will produce the lowest borrowing cost over their full five-year terms, although the potential that they will take borrowers on a bumpy ride has increased since the start of the US/Iran war.

BoC Governor Macklem has confirmed that the Bank will look through the oil-price spike over the near term. But if the war drags on and the inflationary impact from higher oil prices becomes broader and more entrenched, there will come a time when the Bank must tighten.

For now, my assessment is still that we won’t get to that point. But so much depends on how long the US/Iran war will last and if/when the Strait of Hormuz will re-open. Both remain open questions

Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and in some cases, higher payments).

Insider’s Tip for Borrowers

Does the payment frequency you choose have much impact on your mortgage?

The correct answer might surprise you.

Three Posts Every New Visitor to My Blog Should Read

1. Should Canadians Choose a Fixed or Variable Mortgage Rate During a Trade War?

This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty. 

2. What Every Canadian Borrower Needs to Know About Fixed-Rate Mortgage Penalties

For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender. 

3. What’s in the Fine Print

This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.)

David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.

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