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July 30, 2025 - should the bank of canada lower rates?
As expected, the Bank of Canada maintained the overnight rate at 2.75% (leaving the Prime rate unchanged at 4.95%), citing reasons such as the Canadian economy “showing some resilience so far”, despite that the Bank estimates that “GDP has likely declined by 1.5% in the second quarter” due to lower demand for Canadian goods by U.S. importers, which will also have negative impacts on Canadian employment going forward.
Inflation rose from 1.70% in May, to 1.90% in June, which the Bank of Canada stated “largely reflects an increase in non-energy goods prices. High shelter price inflation remains the main contributor to overall inflation, but it continues to ease”. The non-energy goods prices the Bank is referring to was an increase in the cost of clothing and footwear caused by tariffs to U.S. goods, however the cost of shelter will come down when the Bank decides to lower interest rates, so the Bank is itself, a contributor inflation at this time.
The overnight rate is above the rate of inflation
As you can see in the above chart “Bank of Canada Overnight Rate vs Inflation Rate”, The Bank of Canada’s overnight rate rose significantly between the years 2004 and 2007. The Canadian economy was showing strong growth during this period due to the commodities boom which was largely fueled by the massive expansion of the Chinese economy at the time, as well as demand for home building materials in the U.S..
With Canada’s economy experiencing high growth during that time, the Bank of Canada raised the overnight rate well above the rate of inflation, despite actual inflationary pressure being low and hovering around Bank of Canada 2.00% target (between 2004 and 2007, Canada was seeing prices of many items decrease as China’s manufacturing sector boomed).
During that period the U.S. saw much higher inflation due to an overheated real estate market, which was not present in Canada, so it made sense for the U.S. Federal Reserve to raise rates to the degree they had at the time.
The main cause of the subprime crisis of 2008 was the bursting of the U.S. housing bubble which was created by poorly underwritten U.S. mortgages referred to as “ninja” mortgages (no income, no job, no assets) which basically meant that you simply had to have a pulse and be over 18 years of age to qualify for a mortgage.
Prices of homes in the U.S. skyrocketed between 2004 and 2007 due to high demand as a result of these types of mortgages, which as I mentioned, caused the Federal Reserve to raise interest rates.
The higher U.S. interest rates led to higher mortgage payments, which of course led to massive defaults on mortgages in the U.S. as borrowers were not able to make the higher payments cause by higher interest rates. The large number of defaults on mortgages caused foreclosures to rise and home prices to plummet.
Although Canada did have more relaxed mortgage rules prior to the crisis, such as 100% financing and alternative manners of qualification with low rate lenders, housing prices remained fairly stable in Canada while prices rose and fell in the U.S..
The reason for the Bank having overshot with high interest rates during the period between 2004 and 2007, had to do with the “Forward-Looking” approach that the Bank takes when determining interest rates, but also had to do with the Bank’s tradition of following the Federal Reserve policy too closely.
Following the Federal Reserve’s lead on Canadian interest rate policy may seem to make sense since our economies are so closely linked, especially in the past when our economies were more similar, but now our economies are so much different, given that the U.S. is mainly a services based economy, and ours is a mostly manufacturing and commodity based economy, with our number one industry being real estate. The service sector in the U.S. has always outpaced U.S. manufacturing, and the service sector exceeded the U.S. commodities/agriculture sector in size in about 1905.
Taking an overly cautious approach to interest rates, and following the Federal Reserve’s lead on interest rate policy holds back economic growth in Canada. A more independent approach to monetary policy in Canada is necessary at this time, especially since inflationary pressures differ between the two countries due to differing tariff strategies.
Forward looking, is basically the same as hypothesizing, so the when it comes to this aspect of the Bank of Canada’s approach, our economic growth lies in the ability of the Bank of Canada to predict the future, which in today’s ever-changing political and economic climate, is more difficult to do.
Should the Federal Reserve be lowering interest rates at this time? Perhaps not since the U.S. has placed tariffs on imports which are major contributors to inflation and the U.S. economy is far stronger than Canada’s, with Americans having much more disposable income to spend compared with Canadians.
Tariffs imposed by Canada are less inflationary in nature, and are specifically targeted on U.S. imports, rather than global imports such as the approach taken by the Trump administration. Also, while the U.S. is showing economic growth of 2.90% annually, Canada is showing growth of only 2.30%.
A clear example of the difference between the performances of the U.S. economy vs that of Canada, is that GDP per capita somewhat matched the growth of U.S. GDP per capita up until the point where Justin Trudeau was elected. Now, GDP per capita in the U.S. stands at $89,105 while in Canada it stands at $54,283 USD, which falls right between the GDP per capita of the 2 lowest GDP per capita states, slightly above that of Missouri, and a fair bit lower than that of Alabama.
Canada’s economy needs stimulation, which the Bank of Canada is not providing.
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Jeff Laberge
Mortgage Broker
June 2, 2025 – The downward trend
Despite the fact that Government of Canada bond yields, which are the basis for fixed mortgage rates, have risen in recent weeks, the overall pattern is still downward trending.
As we can see in the chart, bond yields have risen to the resistance level of the trading channel, just as they had done several times in the past year as the yields follow their downward path.
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Jeff Laberge
Mortgage Broker
July 15, 2025 - Inflation now at 1.90%
Inflation rose slightly in Canada from 1.70% in 1.90% in the month of June. Although this is an increase, the rate of inflation is still below the Bank of Canada's 2.00% target rate, and the only thing stopping the Bank of Canada from lowering interest rates is the uncertainty caused by U.S. tariffs and Donald Trumps constant changing of tariff rates.
Items which saw the the biggest price increases were clothing and footwear, as a lot of U.S. items in this category have had tariffs placed on them by Canada. The rise in the prices of food and shelter came down slightly.
Inflation came in higher in the U.S., jumping from 2.4% to 2.70%. U.S. government bond yields are often traded in ETFs (Exchange Traded Funds) that include other sovereign bonds, including Canadian government bonds, so this jump in U.S. inflation has caused Canadian government bond yields to jump slightly as well, however the jump was minimal, and not unlike the average daily move on any typical trading day.
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Jeff Laberge
Mortgage Broker
May 1, 2025 - Bond yields bounce off previous lows
May 1, 2025 - Bond yields bounce off previous lows
May 1, 2025 - Bond yields bounce off previous lows
Government of Canada bond yields, which are the basis for fixed mortgage rates in Canada, continue to bounce off of previous lows, as you can see in the chart above. Bond traders and their trading software use previous highs and lows in charts to determine when to buy and sell to take profits or stop losses. This has to do with what is called "technical analysis" which uses chart patterns to forecast where prices/yields are headed, and the more traders that use these chart patterns, the more likely the price/yield will move in the anticipated direction.
When the yield hit the last previous low point, it coincided with a U.S. government bond sell off by countries opposed to U.S. tariffs which caused U.S. bonds to rise rapidly, bringing our bond yields up slightly with them.
May 1, 2025 - Bond yields bounce off previous lows
May 1, 2025 - Bond yields bounce off previous lows
Although our yields were pulled up by the sell off, as you can see in the second chart above, the spread between Canadian and U.S. bonds is growing larger with ours falling more rapidly than theirs due to higher inflation fears in the U.S. as a result of such high and broad tariffs.
May 1, 2025 - Bond yields bounce off previous lows
In the chart above, we can see the downward trend channel that Government of Canada bond yields have been traveling in. Just like previous lows and previous highs, trend channels which include an upper resistance line and a lower support line, are used by traders and the software that they use to determine where prices/yields are headed. The yields were actually about the breach the trend channel until the selloff of U.S. bonds had occurred.
Overall there are still major factors which point towards rates falling further:
1) The price of oil, which is the largest driver of inflation, has fallen almost 25% since it’s peak earlier this year.
2) A slowing of the Canadian economy will reduce spending, putting less upward pressure on prices
3) The main factor keeping inflation above 2% in Canada is the price of shelter, which is directly related to interest rates. Falling interest rates will relieve shelter costs and lead to lower inflation.
April 1, 2025 - The Journey of Fixed Rates - Pandemic to Present
The chart in this article illustrates the journey of government bond yields (and subsequently fixed rates) since the pandemic.
You can see in the chart the rates were at historic lows during the pandemic but as inflation rose, the yields rose as well. The Bank of Canada then began aggressively raising rates to bring down inflation, which had it's desired effect, causing the yields to stabilize somewhat, with the peak occurring in late 2023.
The yields have been coming down since the peak because inflation is now at the Bank of Canada's target rate.
When yields or stock prices follow a long term trend, it is never in a straight line and there are bounces along the way.
In the chart you will see "bounce 1" and "bounce 2". When prices, be it stock prices, bond prices, or bond yields, hit previous highs and lows where strong past changes of direction occurred, the prices/yields will reverse their trending direction momentarily as investors take profits and stop losses. This is because investors, as well as the computer-based trading systems they use, all use the same technical indicators (chart patterns) to determine when to expect changes of direction to occur.
Since they all use the same patterns to determine price direction, it is almost guaranteed that these patterns will occur since prices move in the direction of the majority of positions held (if there are more buyers, it goes up, and vice versa).
Eventually the yields should clear the previous low which caused "bounce 2", and they should continue to fall from that point onward leading to lower fixed mortgage rates.
