Chad Moore Calgary Mortgage Broker

Wednesday, September 4th the Bank of Canada released their latest interest rate announcement. Here’s what’s important for you to know!

Trade Conflict:

“As the US-China trade conflict has escalated, world trade has contracted and business investment has weakened. This is weighing more heavily on global economic momentum than the Bank of Canada had projected in its July Monetary Policy report. “

The Bank of Canada (BoC) has the primary mandate of maintaining Canada’s inflation target at 2%. They are also committed to forward thinking to anticipate the direction of Canada’s economy.

Case and point, was the Bank of Canada’s Governor, Stephen Poloz, announcing an interest rate cut in 2015 despite current economic strength. The BoC was anticipating economic headwinds due to the oil price shock.

I wrote on the Bank of Canada’s July Monetary Policy Report here and that contains strongly worded concern related to the Global Economy. Now the BoC is stating their concern of the global economy is growing? That is not to be taken lightly.

Ray Dalio, writer of the book Principals, considers the US/China trade-war as something much more than an economic play. His outlook is more idealogical and polarizing than a surface tariff battle. Ray looks back at the rise and fall of economies throughout history and gives context to the rise of China’s economy, and the peak of the US economy. I think he paints a picture of this being the beginning of a power struggle beyond tariffs on consumer products. How do you see this struggle unfolding?

The global economic uncertainty is dampening the national and global growth outlook causing down pressure on international monetary policy and bond yields in many other countries around the world. Canada’s central bankers are taking note.

Interest Rate Outlook: Bonds & Inverted Yield Curve

About one year ago the Bank of Canada and the US Federal Reserve were raising interest rates. The US Federal Reserve was also reversing Quantitative Easing, entering an era of Quantitative Tightening. The narrative within the investment community was that rates were to continue to rise.

And guess what?

The market did NOT like the direction of the monetary leaders. The S&P 500 (500 of the largest US stocks weighted by capitalization) dropped in November. Investors were reallocating their money to the safety of the bond market.

The bond market is where fixed Mortgage interest rates are derived. As bond yields drop, so do fixed Mortgage interest rates.

“Commodity prices have drifted down as concerns about global growth prospects have increased. These concerns, combined with policy responses by some central banks, have pushed bond yields to historic lows and inverted yield curves in a number of economies, including Canada.”

Here’s what the inversion of the yield curve means, related to the Mortgage market …

“Normally” investors want a higher rate of return for longer term investments relative to shorter term ones. An inversion of the yield curve presents a situation where investors have a higher return on shorter term investments than longer term investments.

Relating this information back to your Mortgage world …historically an inverted yield curve is viewed as a concern for the economy. I think this also creates an opportunity. Here’s what I mean; we have low fixed interest rates and low Mortgage payout penalties. Many Mortgage payout penalties factor in the current market interest rates for the remaining term of the Mortgage. If these rates are higher, this will trigger a three month interest penalty versus the dreaded “interest rate differential” penalty. Good news for those who are breaking their Mortgage (assuming they do not have a restricted Mortgage).

If you have a question about arranging a new Mortgage, or changing your current Mortgage, let me know by visiting this link: www.chadmoore.co/work-with-chad

Canada’s Economy: Positive Momentum

Canada’s recent economic momentum is driven by stronger energy production and robust export growth. Housing activity has re-gained strength, supported by lower Mortgage rates. Wages have picked up further, boosting labour income, yet consumer spending was unexpectedly soft. Business investment contracted sharply after a strong first quarter due to heightened trade uncertainty. All of this contributes to the Bank’s second half economic outlook to be slow.

For years now, the Bank of Canada has been expecting business investment to pick up the slack of consumer spending. As mentioned, global trade uncertainty and the ratification of Canada-US-Mexico trade agreement are cause for pause for some businesses.

Also, the narrative of “prepare for higher interest rates” & “pay down your consumer debt” have been pounded into the heads of Canadians for many years now. Is it possible that consumer spending is down, with wages higher, because people are paying down their consumer debt? Frankly, the Canadian economy needs people spending money. We’ve been in this dance of increasing debt-to-income ratio due to spending which turns the economy, yet asked to also pay down our debt.

Consumer spending might also be lower as the previous 5 interest rate hikes work their way through our economy. This process can take up to two years. The first monetary tightening move was July 2017. There are four more rate hikes still to take their full effect working their way through the economy.

Inflation On Target

Inflation is on target in Canada with the Consumer Price Index at 2.0%. Other core measures of inflation are 0.1% +/- the 2% inflation target.

I think Canada is in the enviable position of having positive inflation right now. Why? Because traditional monetary policy tools are designed to manage inflation. I think the monetary tool box is not as equipped for deflationary pressure.

With our current inflationary environment it seems like the past guidance, action and forward thinking of our central bankers has been justified.

Current and temporary factors are placing upward pressure on inflation like higher prices for air travel, mobile phones and some food items, that are offsetting lower gasoline prices.

The Bottom Line

Canada has a relatively small economy that is open and exposed to many different global economic factors. These primary factors are uncertainty in the US-China trade war, ratification of CUSMA, and easing of other nations monetary policy.

The market is anticipating the next move by the Bank of Canada to be a rate cut. This bodes well for those with adjustable interest rates as you can expect about a $12 dollar reduction in monthly Mortgage payment for every $100,000 borrowed. However, be careful what you wish for.

I’m reading some think the rate cut should happen now as the “road ahead” looks to be up hill and bumpy for the global economy. On the back of this rate announcement, the bond market has risen and our dollar has strengthened which acts as a form of economic suppression.

Thank you for reading. Should you require any Mortgage related financial changes, do reach out to me for a no-risk, no-obligation consultation.

Talk soon,
Chad Moore