The Debt Ceiling Deal and Your Mortgage Rates

With the passing of a debt ceiling deal earlier this week, the US (and by association, Canada) has avoided the worst case scenario. Without any deal, as you’ve probably heard a million times over the last few weeks, the US credit rating would’ve been downgraded and mortgage rates across the continent would’ve been affected. Of course, that does not mean that the US is out of the woods entirely. While the negative effects of the deal’s spending cuts will likely be spread out over the next decade, at the very least the lack of any new spending or stimulus will almost certainly ensure that a year from now, at a minimum, the stagnant US economy will be no better off than it is today.
Shifting our focus to our side of the border, the economic outlook couldn’t be any more different. The most recent Bank of Canada report suggests that our economy will continue on a steady course towards full output, which should be reached in the next year or so. Inflation, in spite of the ridiculously low interest rates, appears not to be an issue. General inflation is towards the high end of the 1-3% target range, but still within that range and expected to decrease as certain energy price shocks make their way through the economy. Core inflation is sitting around 2%, right in the sweet spot of the target range.
So let’s start putting the pieces together. Inflation is now, and expected to remain, at a level which wouldn’t require any monetary policy changes (increases in the prime rate). The Canadian economy is moving at almost full steam. The US economy, on the other hand, is sputtering. The last two points, when combined, seem to ensure that the Canadian dollar (relative to the US dollar) will, at the very least, maintain its current value, which is already seen as being a bit higher than its optimal level. A rate hike will only serve to put even more upward pressure on our dollar. All of this together suggests that, while there is pressure on the BoC to raise the prime rate, if only because economists and the public seem to expect them to have to after a few years of low rates, the fundamentals (which are ultimately the only important variables for the BoC) clearly state that a rate hike should be postponed for the foreseeable future.
What does this mean for the average Canadian? If you’re in the market for a new house, talk to a mortgage broker about adjustable rate mortgages (as they will almost definitely be a better option than fixed rate mortgages for the next few years).