Chad Moore Calgary Mortgage Broker

Here’s what you can find in this post:

[] Why the Bank increased interest rates?

[] What this means to your adjustable and fixed rate Mortgages?

[]  What might happen in the future?

Why The Bank of Canada (BoC) Increased Interest Rates?

Three years ago the BoC reacted to the oil price shock our economy was absorbing with two interest rate decreases (0.50% total rate decrease).

Side Note: As the Bank of Canada decreased these interest rates, the major Banks in Canada DID NOT pass along these rate decreases to Canadians.  The Bank prime rate in each rate decrease instance, only fell by 0.15% or 0.30% total.

Today, these rate increases are based on “stronger than expected economic data, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining”.

Last week Canada’s Gross Domestic Product (GDP) came in at 4.5% in the second quarter.  This high economic data gave the BoC a platform to stand to raise rates.

The Banks Prime lending rate increased in lock-step with the BoC’s rate increase of 0.25%.  The Prime interest rate is now at 3.20%.

What This Means To Your Adjustable And Fixed Rate Mortgage?

I think economic concerns, related to home affordability for those borrowers with adjustable rate Mortgages, are very low.  In 2010 a qualifying stress test was created for those Mortgage applicants wanting an adjustable rate.

Adjustable rate Mortgage borrowers can plan for a payment increase of about $12/month for every $100,000 borrowed.  Many of my existing clients are prepared for this payment increase, not only in terms of qualifying at a higher stress-tested payment, but in terms of Mortgage planning.

A result of interest rate increases signals economic strength to “the market”.  This pushes the Canadian dollar and Canadian bonds higher.

Today, our dollar is at $0.82 relative to the US dollar. Since the two most recent BoC rate increases, the Canadian dollar has surged about 10 basis points. For you and I, ordering goods from Amazon, this helps us.  For those businesses in Canada, competing internationally in the export market, this is a serious headwind.  Why?  Our goods are becoming more expensive AND we’re facing more and more globalization.  For example, our auto industry is competing with Mexico’s developing auto industry.

Canada’s Bond market is also increasing with economic signs of strength.  Since about the time the Bank of Canada made mention of increasing interest rates, we can see the Bond market increased about 0.85 basis points.  This puts upward pressure on Mortgage rates.  This also effect the Mortgage Qualifying Rate (MQR).  The MQR is used as a “stress test” interest rate to qualify Mortgage applicants with less than a 20% down payment.

What Might Happen In The Future?

From the Band of Canada media release on September 6th, many people are scrutinizing the language used to make this rate announcement.

“Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some father considerable monetary policy stimulus in place is warranted”.

Plainly put, the policy stimulus is the rate cut from three years ago.  The word “some” can be interpreted to mean the two rate increases have taken “some” of the stimulus away, leaving an opening for future rate hikes.

Here are some key indicators I’m watching for you to anticipate future rate hikes:

1.  Loonie Value Movement:

As mentioned above, I think Canada’s manufacturing and exporting sectors could be facing strong head winds with rising export costs and increasing global competition.  I think it’s true that other currencies, relative to the US dollar, are also experiencing a similar increase in valuation more so due to USD devaluation.  I think this does make US domestic product more appealing for purchase, again increasing competition.

2.  Low inflation:

I think inflation has remained lower for longer than expected.  FYI, the mandate of the BoC is to maintain an inflation rate of about 2%.  In the recent years, the BoC has been seemingly OK with inflation being below the 2% target.  It seems the BoC is “anticipating” inflationary pressure, based on recent economic news.  I think the reality is the market and economy need time to let this policy change catch up and offer new data before another rate hike is made.

3.  Wage Growth (or lack thereof):

One of the several of the legs the BoC is standing on, as recent economic data supporting these rate hikes, is increasing job creation.  A missing piece to this puzzle is an equal rise in wage growth.  Similar to supply and demand for commodities; as the pool of eligible workers shrinks, wages increase to attract and compete for workers usually happens.  This isn’t the case, “wage and price pressure are still more subdued than historical relationships would suggest, as observed in some other advanced economies”.  If this disconnect continues, the BoC might be cautious about another rate hike?

***

With the recent interest rate hikes from the BoC, behind us, and a reasonable case made for each, I think a third rate hike would need significant support data.  Keenly watching a surging Loonie, flat inflation and slow wage growth, are leading indicators of any potential rate hikes.  If you have an adjustable rate Mortgage, it’s gut check time.  I STILL think, staying the course is a strategy worth considering versus switching to a fixed rate.  My two cents.

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Talk soon,

Chad Moore