Key Government Rate Falls to 3-Month Low

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One truth in economics is that mortgage rates typically follow inflation expectations, at least over time.

That eventually poses a problem for borrowers, particularly after consumer prices take flight, like they have this year. U.S. core inflation, for example, recently jumped the most in four decades, 0.9% on a monthly basis.

That “was well above what I and outside forecasters expected,” remarked Federal Reserve Vice Chair Richard Clarida. (Our country usually takes its rate cues from the U.S., so when the Fed talks, Canadian markets listen.)

But the bond market, which is normally hyper-sensitive to rising inflation, did something unexpected this week. It shrugged off the inflation concerns.

Instead of pushing rates up, investors drove them to their lowest level in three months. The Bank of Canada said this week that inflation will ease up by year end, and markets believe it.

This all begs one key question, however. Are rising consumer prices just temporary or will record stimulus, supply shocks, opportunistic firms, rising wages, de-globalization, commodity price increases, spending record savings, and other trends keep prices elevated?

Clearly most of these inflationary trends will peter out eventually, but no one can say that all such inflation pressures are short-term. Some are clearly less temporary, and that should prove apparent when the economy fully re-opens.

If inflation remains above target for 6+ months, this would only reaffirm that rate normalization is Canada’s destiny.

“The speed of this economic recovery is like no other,” said TD Economics this week. In years gone by, economic forecasts like those we’re seeing from the Bank of Canada “would already have caused the Bank to start tightening policy,” Capital Economics said in a report.

So, the market believes it’s just a matter of time before bond yields resume their ascent. Knowing that, lenders may pass along a smidge of their funding cost savings (savings precipitated by falling yields). But we anticipate that few, if any, major fixed-rate cuts are on the near-term horizon.

Facts of the Week:

  • Canadian’s real estate equity has shot up to a record high of 76.5%.
  • “40% of household wealth was concentrated in real estate,” says TD, the highest share on record



4 Comments

  • William B Maddaford says:

    If rates continue to climb, then mortgage payments will climb over time as well. That has to be bad for an economy that relies on consumer spending for 65% of GDP, You can’t spend money you have to pay to the bank for your mortgage. The BOC knows that which is why it will not raise rates in the foreseeable future.

    • The Spy says:

      Hey William,

      What you’re referring to will result in fewer rate hikes, but the *timing* of the first BoC hike will hinge overwhelmingly on the BoC’s inflation forecast, and little else.

  • Anthony says:

    Caught you Spy!–still sneaking some articles here? lol

    • The Spy says:

      Yesiree Anthony, Guilty as charged. We’ll still be posting on the Spy for now, albeit most content has shifted over to Rates.ca as part of our news consolidation efforts…Cheers, R

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