Canadians expecting good news for mortgage rates just got the exact opposite. The Bank of Canada (BoC) made no changes to the overnight rate, as expected by the market. While no cuts were expected, it was still widely believed they would reassure the market of progress on inflation, helping to reinforce expectations of rate cuts in the coming months. They did the exact opposite, delivering an upward revision to global GDP growth and warning of upside inflation risks, sending bond yields soaring, applying pressure to drive mortgage rates higher.
Canadian Inflation Is Cooling, But Expected To Be Sticky From Here
The BoC emphasized its recent progress on taming inflation. CPI slowed to 2.8% in February, and Core CPI cooled to 3.0% over the same period. They see slower progress in the coming months though, forecasting it will hover around 3% in the near-term. They still believe a 2% target can be reached next year, but warn a number of factors are creating upside risk.
“Inflation could be higher if global tensions escalate and this boosts energy prices and further disrupts international shipping,” explained BoC Governor Tiff Macklem.
Adding, “House prices in Canada could rise faster than expected. And wage growth could remain high relative to productivity.”
Bank of Canada Sent Yields Soaring, Bad News For Mortgage Rates
Markets weren’t expecting cuts today, but they were expecting a relief discussion. The BoC acknowledged households are eager for cuts, but warned it would need to see “sustained” progress before it becomes a consideration. Talk of easing too early could jeopardize the progress made, as it did back in January 2023.
Households looking for cheaper mortgages got the exact opposite today. The Government of Canada (GoC) 5-Year Bond saw its yield surge as high as 3.73% on the announcement, before settling around 3.69% midday. Yield for this bond heavily influences borrowing costs for 5-year fixed rate mortgages, traditionally the most popular amongst borrowers. The easing rates seen ahead of the Spring market are likely to catch a headwind as the GoC 5-year bond yield returned to early February-levels almost overnight.
Canadian Economy To Gain Steam, But Global Economy To Surge
Canada’s progress on inflation has been due to its lack of economic progress. Governor Macklem highlighted the stalled growth in the second half of 2023, along with rising unemployment, and moderation for wage growth. According to the central bank, this has created a situation of “excess demand,” allowing slower price growth (or a contraction in some cases).
They expect Canada to see some signs of improvement in the coming months. Real GDP growth is forecast to climb 1.5% in 2024, and “about” 2% in 2025 and 2026, respectively. They see this improvement helping to absorb the excess supply over the next few years.
Unfortunately, that still means Canada is falling behind. The forecast GDP growth is roughly half the population’s rate, implying the per capita decline will continue. At the same time, the central bank increased its global GDP forecast to 2.75% in 2024—nearly double Canada’s growth. This leaves significant risk from imported inflation, since much of the country’s consumption is based on imports.
In short, Canada’s inflation risk scenario slants to the upside.
“We don’t want to leave monetary policy this restrictive longer than we need to. But if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we’ve made bringing inflation down,” said the Governor.
