Trudeau’s government said Monday that it plans to lift Canada’s debt ceiling by up to 57% as it embarks on record spending and deficits in the name of pandemic relief.
Canada’s historic deficit just keeps on climbing. It’s now estimated at $381.6 billion for the current fiscal year, up from $343.2 billion this summer and $19 billion to start the year.
Next year we’ll be another $121.2 billion in the red. The year after, another $50.7 billion in hawk.
“Does Canada really need the proportionately largest COVID fiscal response in the industrialized world?” asked DLC Economist, Dr. Sherry Cooper, today. “The risk is that once created, it is difficult to rein in spending.”
Finance Minister Chrystia Freeland’s response to such criticism: “We will not repeat the mistakes of the years following the Great Recession of 2008.”
In other words, expect minimal fiscal restraint for the foreseeable future.
From a mortgage rate perspective:
Persistently large deficits have historically been the enemy of low rates. But in a world with chronically low inflation, exploding government debt might not be as bullish for mortgage rates as in decades past.
The good news is that the government plans to issue fewer 5-year bonds than expected to pay for it all. Five-year bonds strongly influence fixed-mortgage pricing and less issuance results in lower rates, all else equal.
The bad news is, overall debt issuance will have to climb. That, and all this new spending, should boost inflation quicker, likely adding modest upward pressure to mortgage rates as early as next year.
November was the strongest month for stocks since 1987. That’s the market signalling a resilient year ahead for the economy, despite the speed bump this latest wave of new infections will create.
The OIS market, however, is still pricing in a slightly higher chance of a BoCcut next year than a hike (Source: Westpac).
But with less than a 15% implied probability of a 1/4-point rate cut by December 2021, it’s not significant enough to impact anyone’s mortgage strategy.