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Interest rate news and analysis by Jeff Laberge
Feb. 18, 2025 - Inflation up slightly to 1.90%
Canada's consumer price index rose slightly form 1.80% in December, to 1.90% in January. This change is not large enough to have any severe impact on interest rates, as the stats still include shelter costs which have been elevated due to high interest rates which are expected to fall.
The rise seems to be almost completely caused by a slight rise in the price of gasoline, but overall prices were subdued by the GST/HST tax holiday. Since inflation on items is measured on the final price paid for items, including taxes paid on the items, inflation was lower on most items than it would have been without the tax holiday.
Feb. 6, 2025 - 5 year government of Canada bond yield hits major previous low.
The 5 year Government of Canada bond yield, which is the basis for 5 year fixed mortgage rates in Canada, hit a major previous low this week, which is a significant signal for where rates are likely headed.
When prices, be it stock prices, bond prices, or bond yields, hit previous highs and lows where strong past changes of direction occurred, the price/yield will reverse it's 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 guarantees 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).
It may take a few days for investors to change positions, but hitting a previous low with such downward velocity should be a strong indicator for a continued fall in the yields, and when the yields fall, fixed rates fall with them.
Feb. 3, 2025 - Tariffs and Interest Rates
Over the weekend, the Trump administration announced that they will implement a 25% tariff on Canadian exports to the U.S., with a reduced tariff of 10% on Canadian energy exports to the U.S..
Impact so far on fixed rates
So far the confirmation of the tariffs has caused government of Canada bond yields, which are the basis for fixed mortgage rates in Canada, to fall significantly in the first few hours of trading since the decision was announced. This will almost immediately cause a slight decrease in fixed rates, but we are still only in the first few hours of trading and cannot confirm with certainty at this point if the downward trend will continue, and if so, how far rates will fall.
Potential impact on variable rates
I cannot of course speak for the Bank of Canada, but the longer the tariffs stay in place, the more businesses and industries that are affected by tariffs will suffer, which will lead us into a recession.
During a recession, the Bank of Canada lowers their key interest rate to stimulate the economy by making borrowing less expensive.
One major Canadian bank has asked the Bank of Canada to make an emergency rate cut in response to the tariffs, which is an indication of how some economists are reacting to the news and what they believe will help. The only risk of the Bank of Canada lowering the key interest rate too quickly is that it will send our dollar downward, which will make imports into our country even more expensive, leading to higher inflation. Rising inflation while experiencing rising unemployment causes what is called stagflation, which is a nightmare scenario for an economy, and likely the Bank of Canada’s greatest fear at the moment. The Bank of Canada will therefore be facing a balancing act.
There is no reason to panic at this time about what impact the tariffs will have on interest rates. Almost all indications at this point show rates going to the downside which is good for borrowers. The real concern for Canadians at this point seems to be the chance of elevated unemployment, with certain sectors being hit harder than others. Our thoughts are with the Canadian who will have their household incomes affected by these outrageous tariffs and hope that our government will make the right decisions to help them keep on financial track.
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Jan. 29, 2025 - Bank of Canada lowers key interest rate by 25 basis points.
The Bank of Canada today lowered their key interest rate by 25 basis points (0.25%), bringing the Prime rate with most lenders down to 5.20%. This falls in line with what most analyst were predicting.
With the U.S. economy outperforming the Canadian economy at this time, along with higher inflation in the U.S. compared with Canada, the Bank of Canada will need to consider the affect that lowering the overnight too quickly will have on the Canadian dollar. The further apart Canadian mortgage rate stray from U.S. rates, the further the Canadian dollar will fall compared with the U.S. dollar, which will raise the price of imports from the U.S., leading to inflation.
The Bank of Canada has also ended their program of Quantitative Tightening, which has been in place since the end of the pandemic to help raise bond yields to battle inflation. Ending this program will put downward pressure on government bond yields, which are the basis for fixed mortgage rates.
