The Bank of Canada Remains in Neutral

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

Its accompanying communications continued to focus on two key areas of uncertainty: 1) the Middle East conflict and 2) ongoing uncertainty around US trade policy.

The Bank’s overall growth outlook was “broadly unchanged”, but it also noted recent “signs of improvement”, with growth “picking up” and inflation “projected to ease gradually from its recent spike”.

It removed references to possibly needing to enact consecutive rate hikes if the energy price spike leads to more generalized inflation, and it left out its previously expressed willingness to enact additional cuts in response to new US trade barriers.

BoC Governor Macklem noted that “there are risks on both sides” of the Bank’s 2% inflation target, and he reassured Canadians that it would be nimble if required. But overall, the Bank judged that its current policy rate “remains appropriate” and it simply restated its willingness “to adjust monetary policy as needed”.

The BoC expects inflation to “ease gradually in the coming months” and to return to target early next year. It noted that “longer-term inflation expectations remain well anchored”.

The Bank continues to assess our current labour-market conditions as “soft” because our economy remains in a state of excess supply. That raises concerns about the health of our labour market but also leaves our economy with plenty of room for non-inflationary growth.

The Latest on Mortgage Rates

Government of Canada (GoC) bond yields fell immediately following the BoC’s release of its latest policy statement, likely because bond-market investors were expecting more hawkish language.

Nonetheless, by the time the dust had settled at the close of business on Friday, GoC bond yields finished the week almost exactly where they started.

Fixed mortgage rates held steady, and variable-rate discounts off prime were unchanged.

Bond-market investors are currently pricing in one 0.25% hike by the BoC at its last meeting of this year in December. I don’t expect that hike to come to fruition, for reasons I outline in the next section.

My Take on Today’s Mortgage Options

Fixed rates have been range bound for some time now, but the GoC bond yields they are priced on could be subject to wide swings in the face of so much ongoing uncertainty.

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

While I appreciate the appeal of fixed-rate stability in our current volatile environment, I continue to believe that variable rates will likely prove cheaper over their full terms.

(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.)

The BoC continues to look through our recent inflation spike because it has thus far been limited to surging energy prices.

If the US/Iran war drags on and its associated inflationary impacts become broader and more entrenched, there may come a time when the Bank will be compelled to tighten. For now, my assessment is that we won’t get to that point, and I am encouraged by the rapid drop in energy prices after the US/Iran sixty-day cease-fire was announced (and despite the retracement since).

Simply put, trade uncertainty remains the greater long-term threat to our economy.

The recent US decision to not extend CUSMA ensures that uncertainty will remain a headwind for our economy in the foreseeable future. I still believe that, at some point, the BoC will be compelled to lower its policy rate to a stimulative level (of 2% or less) in response.

Insider’s Tip for Borrowers

This post offers mortgage advice to homeowners who are trying to work through a divorce.

It outlines some key steps that must be taken prior to removing a spouse from title and/or completing a refinancing to buy them out. It also includes several other useful tips that I have accumulated over many years of helping borrowers navigate a marital split.

Three Posts Every New Visitor to My Blog Should Read:

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.

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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