There has been a great deal of concern as our Canadian dollar gained in strength and economist were concerned that the high value of our currency would negatively impact trade with our export partners. That are less willing to pay higher prices for or goods. However, there is a bright side to this on the home front because although the economy overall could suffer from less export, within the country the Bank of Canada (BoC) decided that raising interest rates would compound the problem of an overvalued dollar and opted to leave the bank rate static to help to curb the increasing value of the dollar. It was thought that increasing rates would encourage foreign investment in Canadian bonds and a greater demand for Canadian currency to pay for those bonds, thus creating a negative economic cycle.
For prospective home buyers in Canada the news is great! Mortgage rates are either indirectly tied (variable rates) or directly tied (fixed rates) to the Bank of Canada’s lending rate or ‘Prime’ rate. This rate is chosen by the BoC to help to optimize economic growth and inflation. Understanding how the economy is doing and what the desirable economic climate is key in better predicting how the prime rate and thus how Canadian Mortgage rates might change going forward.
Inflation rate
The inflation rate is another factor that influence the BoC’s rate and as a result mortgage rates. it is ideal for the Bank to keep this rate between 1%- 3% (with a 2% median). When inflation is too high then rates are increased, and the cost of borrowing also goes up. Conversely, a decrease in spending will curb the rate of inflation. Predictions made in April suggested that the inflation rate would be almost .5 over 3% and thus a rate hike would be required to accommodate this. However, this was not the case and as a result minimal rate changes were required.
Economic Growth
The GDP (Gross Domestic Product) for Canada measures the country’s economic growth and although the amount is reported quarterly, there are forecasts suggesting that the growth will slow down in the second quarter again resulting in steady interest rates. Increasing the interest rate would further slow growth an undesirable result.
Understanding how these three factors work to influence mortgage rates is instrumental in creating your own plans to acquire a mortgage or to consider home refinancing.
Finally, economist surveyed by Bloomberg believe that the next hike will come no sooner than September. There also exists a financial market called Overnight Index Swaps (OIS). The OIS is also used to derive market expectations for future rate changes. After the May report, the OIS produced probabilities of 10%, 20%, 50% corresponding to the likelihood of a rate hike in July, September, and October, respectively (https://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/05/.
Thus, all predictions suggest that rate hikes are coming, but not until later this year. It seems now is the right time to speak to a mortgage broker to take advantage of the steady rates.
