The recent unexpected jump in inflation should serve as a red flag to homebuyers – and homeowners looking at a mortgage renewal or considering refinancing an existing mortgage – that today’s low interest rate environment is a window that will, inevitably, close. Macroeconomic pressure will, sooner or later, force the Bank of Canada to tighten credit markets by resuming a regimen of rate hikes that has already boosted the price of many mortgage products.
Bank of Canada Governor, Mark Carney, is walking a fine line and is being pressured by two conflicting concerns. He has acknowledged that Canadian monetary policy cannot verge too far from that of the United States without harming our economy. However, while the Bank of Canada began to tighten credit conditions earlier this year (raising its key overnight lending rate three times in 2010 before passing on a further rate hike in November), south of the border the Federal Reserve has begun further quantitative easing in an attempt to kickstart the moribund U.S. economy by buying up longer term treasury bonds. While the Bank of Canada is clearly cognizant of moving too far in an opposite direction from the Fed, it is nonetheless tasked with keeping inflation at a 2 percent target.
It is most likely that the Bank of Canada will again pass on raising rates at its scheduled December 7 rates review meeting due to concerns over the fragility of the recovery, both domestically and in the U.S. and overseas. However, continuing inflation above the central bank’s 2 percent target would force them to raise rates earlier in 2011 than many analysts have forecast. Of course, October’s inflation numbers could be a tempest in a teapot or a one-off aberration.
“I think the Bank of Canada won’t view (October’s) inflation report as unduly worrying,” TD-Bank chief economist, Craig Alexander told Reuters News. “There is still an awful lot of uncertainty related to the economic outlook as we’re looking at unsettled financial markets related to what’s going on in Ireland and continued concerns about the U.S. economy,” he noted.
Still, with inflation clocking in at a two year high, talks of further rate hikes are back on the table. The question for consumers weighing their mortgage options is when such hikes will be implemented. Mr. Carney’s remarks following his December 7th rates announcement will be closely parsed to see where and when Canadian interest and mortgage rates are likely to rise.
