Mortgage Rate Update – Maybe This Time?

With today’s Bank of Canada ( BOC ) decision to raise rates by 75bps, Governor Tiff Macklem affirmed his belief that we are not yet out of the inflationary woods. In fact, the final paragraph of the press release uses language to suggest we might need one more increase. So the question is when will Governor Tiff see the light at the end of the tunnel?

Unlike the last BOC rate increase, nobody was caught off guard. From the economists to the news outlets, we all expected there would have to be at least one more nail hammered into inflation’s coffin before it died off. Today’s press release blamed the usual suspects for causing our inflationary woes; COVID, Russia, natural gas and consumer spending.

You’d think with the last big rate hike, the consumer would have put their wallets down and taken a step back.  The reality is it’s been a rough couple of years, and most of our clients that we spoke to over the summer made the decision to enjoy themselves either by taking a big family trip, buying a boat or creating some sort of memorable experience(s) – I know I did. Now that summer is over, I expect we’ll all get back to work and focus on tightening up the purse strings, which should hopefully tame the inflationary figures for October.

One thing that did catch my eye in the press release was that business investment was up 12%. This is really good news for a couple of reasons.  First – it implies economic confidence from the corporate world, because a company will hoard cash if the CEO feels there is a storm coming, not open up the purse strings.  Second –  business investment usually means a company is spending money on infrastructure or systems improvement. This often leads to a higher productivity output, which means more work can get done with fewer people, which in turn takes the pressure off wage growth.  And taking the pressure of wage growth is a key strategy in ensuring inflation doesn’t stay entrenched.  

So the question is, when will I have something positive to write about?!

It all comes back to production capacity and the return to a balanced market vs this inverted market of not enough supply to meet normal demand. 

If you do your own straw pole and ask 10 of your friends  “have you spent significantly more money this summer than you did in the summer of 2019” I would wager the average response would range from 10% to a maximum of 20%.  More importantly, the makeup of that spending would be largely focused on services vs manufactured items.  Which is important because service prices are more elastic with respect to demand.  And if demand dries up, prices will drop.   Manufactured items, however, is where the inflationary bottleneck needs to open up.   With China starving off the flow of manufactured goods with its insane zero COVID policy and Russia holding natural gas / Ukraine wheat hostage, we are in an inflationary stalemate.   The solution?  Expect the companies to repatriate their manufacturing facilities to North America OR a diplomatic solution to the Ukrainian War.  Both will take some time, but one of these two solutions could end the inflationary pressures with a stroke of a pen, and with it an immediate reduction in rates.

So is now the time to fix your variable rate mortgage?  The answer is still no.  The 5 year Government of Canada bond yield, that mortgage prices are based on, hasn’t changed this morning.  In fact, it’s down from its June 14th high, interestingly enough ( pun intended ) in August, it actually dropped down to the April 14th closing price – which was near the beginning of when rates started their climb.  This tells me that rates will follow quickly once the wind is out of inflation’s sails. As I mentioned in my last rate update, the banks have tacked on a significant premium to all their fixed rate mortgages, so under the right conditions that premium could vanish overnight.

What if you have a mortgage maturing?   Call me! There is no one size fits all solution. Everyone is being impacted differently during these changing times.  Some clients are asking me to protect their cash flow, others are asking how to prepare for opportunities.  Regardless of your situation, I guarantee that with a 30 minute call you’ll walk away with clarity and a better feeling about the world we are in.

Thanks for reading and stay tuned for more updates.

The next Bank of Canada meeting is October 26th, 2022

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Disclaimer Notice: The views expressed in this blog post are based on our opinion. The information has been sourced from the Bank of Canada, and several Canadian news sources. Any forecasts or expectations of the direction of interest rates are based on the collective experience of the Nishka Riley Mortgage Team, and as such any recommendations must be taken within the context of your personal situation. As with any forecast, there is no way to guarantee the outcome of the real estate market or interest rates and in no way is a guarantee implied.