Bank of Canada Council split on latest rate hold

Memo 1: Bank of Canada Council split on October rate hold

On November 8, the Bank of Canada’s Governing Council – the six-member group that decides whether to raise, cut, or hold interest rates in the central bank’s rate policy announcements – released their Summary of Deliberations, an inside peek into the factors that influenced the BoC’s most recent rate hold at 5% on October 25.

The summary reveals that the Council mulled over a number of economic factors, such as persisting strength in the US, softer performance in the Canadian labour markets, and declining consumption, when making their rate decision.

However, the notes reveal policy makers were largely split about their decision to hold, with a number of members feeling another rate hike could be warranted, given inflation remains stubbornly sticky. While Canada’s headline inflation number has been showing progress, slowing to 3.8% in September from 4% in August, the core inflation number – which removes food and energy measures from the equation – has remained firmly in the 3.5% - 4% range over the past year.

That’s making policy makers nervous that higher inflation could become “entrenched” in the economy, requiring higher-for-longer monetary policy measures, such as rate hikes.

“Some members felt that it was more likely than not that the policy rate would need to increase further to return inflation to target. Others viewed the most likely scenario as one where a 5% policy rate would be sufficient to get inflation back to the 2% target, provided it was maintained at that level for long enough,” states the Summary.

“However, there was a strong consensus that, with clearer evidence of higher interest rates moderating spending, slowing growth and relieving price pressures, Governing Council should be patient and hold the policy rate at 5%. They agreed to revisit the need for a higher policy rate at future decisions with the benefit of more information.”

“The summary of the Bank of Canada’s deliberations from the October 25th meeting highlighted the Bank of Canada's dilemma: Growth in the economy is clearly stalling, but inflation remains sticky, and there is some concern that above-target price gains are becoming entrenched,” wrote BMO Senior Economist and Director of Economics Robert Kavcic in an economic update.

“Against that backdrop, one of the burning questions from the prior meeting was again discussed at this one: Does policy need to tighten further? Or is it tight enough, but just hasn't been so for long enough?”

Other key risks highlighted by the Bank include the rising price of shelter, as well as increasing mortgage interest costs, which have soared over 30% compared to just a year ago. 

The Bank also pointed to anticipated fiscal spending from the federal government as a headwind in the inflation fight, as these infusions of cash stimulate the economy.

“As an interesting aside, the Bank sent a pretty clear shot out to fiscal policymakers as we head into budget preparation season,” writes Kavcic. “That is, "by adding to demand at a faster pace than the growth of supply, government spending could get in the way of returning inflation to target." Translation: You keep spending, and we'll keep raising rates, or at least have to keep them at these high levels.”

Memo 2: (Finally) some relief for fixed mortgage rates

Some long-awaited cause for celebration for mortgage shoppers: fixed mortgage rates are finally starting to trend lower as bond yields cooled considerably this week.

Following what has been a (mostly upward) rollercoaster trajectory for yields over the fall months, recent rate holds from both the Bank of Canada and the US Federal Reserve have reassured investors that the central banks’ rate hiking cycles are largely in the rear view, renewing demand for bonds.

The five-year Government of Canada bond yield has dipped to the 3.8% range, down from the high of 4.4% witnessed in October – a 17-year record. 

As yields are used by lenders to set their pricing for fixed mortgage rates, that’s prompted a series of discounting across a variety of mortgage providers this week, with many reducing their offerings by roughly 30 basis points. For example, today’s best insured five-year fixed mortgage rate is 5.39%, down from 5.64% just one week ago.

While no one can say with certainty whether this downward trend will persist, it’s giving today’s rate shoppers some slight relief, and the opportunity to take out a rate hold on some of the lowest rates we’ve seen in recent months. Of course, should rate hikes remain off the table for central banks – and other economic factors play out as expected – it’s possible fixed rates will continue to soften in the coming months.

Memo 3: Mortgage renewals to add $15B in payments over next two years: CMHC

The Canada Mortgage and Housing Corporation has dropped its latest tome on mortgage trends in Canada, with the data revealing how higher interest rates have walloped borrowers and housing demand.

According to the Crown Corporation’s Fall 2023 Residential Mortgage Industry Report (The Housing Observer), outstanding mortgage debt spiralled higher in the first half of 2023, despite a slowdown in new mortgage activity. This was due to existing mortgage holders taking on higher debt servicing costs. As of August, residential mortgage debt in Canada stood at $2.14T, a year-over-year increase of 3.4%. 

The CMHC also pointed to the impending onslaught of mortgage renewals over the next two years, during which 45% of all existing mortgages will need to renegotiate their loans in a much higher interest rate environment – accounting for an increase of $15B in payments each year. This follows the considerable renewal rate pain already absorbed by the market in the first six months of the year, says Tania Bourassa-Ochoa, Senior Specialist of Housing Research for CMHC. 

“In the first half of 2023, more than 290,000 mortgage borrowers renewed their mortgage with chartered banks at a significantly higher interest rate,” she says. “This represents about six percent of the entire mortgage market of Canada. The resulting increase in their debt-servicing costs is putting additional financial pressure on these borrowers.”

Other predominant trends include borrowers’ continued strong preference for fixed-rate mortgages, which – though elevated compared to a year ago – continue to be lower than their variable-rate counterparts. According to the report, federally-regulated lenders doled out $244.5B for fixed-rate mortgages alone in the first eight months of the year, “considerably more” than the $20.1B loaned out for variable-rate mortgages. The CMHC also noted that borrowers also preferred terms between three and five years long, a move away from the demand for shorter terms seen earlier in the rate hiking cycle.

While Canadians continue to be fairly prudent in making their mortgage payments – the share of loans in arrears of 90 days or more remains at historically low levels of 0.15% – the CMHC points to other risk factors cracking their financial stability, including a high national debt-to-income ratio, which hit 171.9% in Q1. The impact of interest rates doubling since the beginning of 2022 cannot be overstated, and is being felt more among other credit products, such as auto loans, credit cards, and lines of credit.

Also read:

• OSFI calls fixed-payment variable-rate mortgages “dangerous”
• High mortgage rates spooked GTA home buyers in October
• Think mortgage rates will drop? The argument for getting a variable rate now
• Bank of Canada holds target interest rate at 5% in October announcement