Chad Moore Calgary Mortgage Broker

If you’re curious about the near to medium term future to Canadian interest rates, read further …

Eight times per year the Bank of Canada make interest rate announcements. Canada’s Bankers announce changes to the “key interest rate” or the “central rate” (same thing) which trickle into changing the “prime lending rate”. Variable and adjustable Mortgage rates are linked to the Prime rate.

Canadian Bankers look at large cogs in the economic machine to anticipate the direction of our economy. The primary focus of Canada’s central bankers is to maintain a inflation rate between 1-3% (ideally 2%) with our economy operating at full potential.

Here are some highlights from the most recent Bank of Canada interest rate announcement and additional thoughts to help you anticipate the direction of interest rates in Canada:

“Recent slowdown more pronounced”

There was a relatively stern warning from Stephen Poloz (Governor of the Bank of Canada (BoC)) in October’s interest rate announcement, that interest rates were set to rise further.

Since then the price of oil, particularly the differential between world oil prices and Canadian oil prices, tanked. In response to this very wide price differential, Alberta’s Government stepped in to curtail production to decrease supply, lifting prices.

Persistent uncertainty with U.S-China trade war and the delay of the new USMCA agreement continue to weight on investment in Canada. For the past year, business investment has been the hopeful segment of Canada’s economy to pick up the slack of decreased consumer spending.

Interest rates hikes also take 18-24 months to work their way through our economy. This means, the first rate hike in July 2017 is beginning to show up in our economy. The proceeding 4 rate hikes are still anticipated to effect our economy in the coming year(s).

The first Mortgage stress test was announced in November 2017 which was targeted for home buyers with less than 20% down payment. The second Mortgage stress test was introduced 15 months ago which targeted home buyers with 20% or more down payment. The economic impact of this suppression of home buyer demand, and other Provincial Mortgage & Real Estate regulations, is beginning to effect Canada’s housing market and economic bottom line.

It’s also been well documented and communicated in National media, Canadian’s are in debt up to their eyeballs. Changes to interest rates, and consumer confidence, have a more pronounced effect on consumer spending than rate hikes in years past.

I think about drinking alcohol in this way …I pull the fun of the next day (possibly the next two days) forward into the evening of drinking. We know this as a hangover. Spending money on credit pulls forward my future spending into that one event. There is a hangover effect to my spending, in this case I’ve pulled my future spending forward, incurring debt and eventually have to repay it. From Canada’s economic standpoint, a major source of growth has been from consumer spending which is now drying up.

“…outlook continues to warrant a policy interest rate that is below it’s neutral range”

Our Central Bankers have given us a target neutral interest rate range of 2.50 – 3.50%. A neutral interest rate would be neither stimulative or restrictive, at a time when Canada’s economy is operating at, or very near, to full capacity. Today’s Bank rate is 1.75%.

I think the truth is, our economy NEEDS a stimulative interest rate. Local and Global economic uncertainty is persistent. However, there are some updates that our Central Bankers are watching.

Recently Canada’s jobs report came out very positive. This is great news!! Jobs, particularly high paying jobs, help drive consumer confidence and spending. More jobs also pull people out of unemployment, decreasing the supply of available workers. As companies compete for workers, this drives wage growth. However, also included in the latest Canadian jobs report is a decrease in the number of hours worked. This could be viewed as more of a negative than the positive news of more jobs.

In conclusion, the only “thing” I can predict with certainty is our uncertain future. Shocking. A favourite personal development teacher of mine, Jim Rohn, said it best …”I can predict the future! It’s opportunity mixed with difficulty. That isn’t going to change“.

One recommendation I strongly ask you to consider is allowing space in your Mortgage for future options and flexibility. I may plan my life in a linear line (timeline of living in the home, income, personal stability etc) but life if far from linear. It’s nice to have options and flexibility in Real Estate. Call me to discuss your next home purchase or sale personally.

Cheers,
Chad Moore