Where Now for Canadian Mortgage Rates?
Where are Canadian mortgage rates headed? And when?
Headlines in the papers are showing that inflation is creeping ever upwards, with the Consumer Price Index topping 3.1 per cent this month on its way to a forecast 4.1 per cent in the new year. While the Bank of Canada has acknowledged its concerns about the economic dangers of heightened inflation and readjusted its projection for domestic inflation, it focused only on the “core inflation rate” in its latest forecast.
A Monetary Policy Report Update was released by the Bank of Canada following its July 15th announcement that the central bank’s key overnight lending rate would remain at 3% – for now. It forecast that total Consumer Price Index inflation would rise temporarily above 4 per cent,
peaking in the first quarter of 2009 as energy prices stabilize. However, the “core inflation rate” relied on by the Bank of Canada in its latest interest rate decision excludes gasoline prices which have increased 26.9% since last June. The Bank of Canada’s reasoning also optimisitically predicts energy price stability in 2009, which right now seems to be a questionable proposition.
At CIBC World Markets, their latest “Interest Rate and Exchange Rate Forecast” predicts that soaring oil prices will soon pressure the Federal Reserve to raise interest rates in the United States, where inflation is already running at a 4% clip. “Best bets for the first move are right after the November election,” according to CIBC’s economists. They expect that the Fed will hike U.S. interest rates by 2% by the Autumn of 2009 “even if it means leaving the (U.S.) economy growing at a slow crawl.” CIBC expects a somewhat later tightening of Canadian interest rates by the Bank of Canada, but notes that both inflation and interest rates will be headed higher.
As gasoline prices increase, added fuel costs are passed on to all manner of consumer products, from food to household goods adding to inflationary pressure. “We look for food inflation to reach 3-1/2% next year as shipping costs add to price pressures,” writes CIBC economist, Avery Sheffield (“Canada Loses its Inflation Exemption“). As the dramatically higher price of gasoline, and therefore shipping, is passed through to the broader economy, even the “core inflation rate” will be affected, forcing the Bank of Canada to account for the real price increases consumers are dealing with.
With a buyer’s real estate market in most centres and mortgage rates still relatively low, sooner rather than later may be the best time for Canadian home buyers and homeowners who are looking for the best rates for mortgage financing or refinancing. The Bank of Canada is next scheduled to review its benchmark-setting overnight lending rate on September 3rd, when Canada’s central bankers will once again look at the pressures on our economy from inflation led by the rapid hike in gas prices. Although, the consensus feeling seems to be that the Bank of Canada wants to leave interest rates where they are to spur growth, more bad news on the inflation front may force the central bank’s hand earlier than expected, leading to an interest rate hike in the autumn rather than in early ’09.