Bank of Canada Just Delivered Bad News For Mortgage Rates, Yields Surge

Canadians expecting good news for mortgage rates just got the exact opposite. The Bank of Canada (BoC) made no changes to the overnight rate, as expected by the market. While no cuts were expected, it was still widely  believed they would reassure the market of progress on inflation, helping to reinforce expectations of rate cuts in the coming months. They did the exact opposite, delivering an upward revision to global GDP growth and warning of upside inflation risks, sending bond yields soaring, applying pressure to drive mortgage rates higher. 

Canadian Inflation Is Cooling, But Expected To Be Sticky From Here 

The BoC emphasized its recent progress on taming inflation. CPI slowed to 2.8% in February, and Core CPI cooled to 3.0% over the same period. They see slower progress in the coming months though, forecasting it will hover around 3% in the near-term. They still believe a 2% target can be reached next year, but warn a number of factors are creating upside risk.  

 “Inflation could be higher if global tensions escalate and this boosts energy prices and further disrupts international shipping,” explained BoC Governor Tiff Macklem. 

Adding, “House prices in Canada could rise faster than expected. And wage growth could remain high relative to productivity.”

Bank of Canada Sent Yields Soaring, Bad News For Mortgage Rates

Markets weren’t expecting cuts today, but they were expecting a relief discussion. The BoC acknowledged households are eager for cuts, but warned it would need to see “sustained” progress before it becomes a consideration. Talk of easing too early could jeopardize the progress made, as it did back in January 2023. 

Households looking for cheaper mortgages got the exact opposite today. The Government of Canada (GoC) 5-Year Bond saw its yield surge as high as 3.73% on the announcement, before settling around 3.69% midday. Yield for this bond heavily influences borrowing costs for 5-year fixed rate mortgages, traditionally the most popular amongst borrowers. The easing rates seen ahead of the Spring market are likely to catch a headwind as the GoC 5-year bond yield returned to early February-levels almost overnight. 

Canadian Economy To Gain Steam, But Global Economy To Surge

Canada’s progress on inflation has been due to its lack of economic progress. Governor Macklem highlighted the stalled growth in the second half of 2023, along with rising unemployment, and moderation for wage growth. According to the central bank, this has created a situation of “excess demand,” allowing slower price growth (or a contraction in some cases). 

They expect Canada to see some signs of improvement in the coming months. Real GDP growth is forecast to climb 1.5% in 2024, and “about” 2% in 2025 and 2026, respectively. They see this improvement helping to absorb the excess supply over the next few years.  

Unfortunately, that still means Canada is falling behind. The forecast GDP growth is roughly half the population’s rate, implying the per capita decline will continue. At the same time, the central bank increased its global GDP forecast to 2.75% in 2024—nearly double Canada’s growth. This leaves significant risk from imported inflation, since much of the country’s consumption is based on imports. 

In short, Canada’s inflation risk scenario slants to the upside. 

“We don’t want to leave monetary policy this restrictive longer than we need to. But if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we’ve made bringing inflation down,” said the Governor.

17 Comments

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  • TIGHT WAD 1 month ago

    Too bad – so sad.
    No one should be shocked.
    Money guys are not backstopping broke Canadians anymore.
    Find a rental if you can’t afford your mortgage payments.

  • dave frazer 1 month ago

    Catch 22, Bond rates up a lot today. Mortgage rates might go up . Houses not currently selling very well but listings rising fast. Competition to sell will soon reduce prices. How much is the question. If they begin to fall fast, the economy contracts (people stop buying due to reduced household equity) Employment then rises as jobs are cut . This then forces more selling and less buying and the fall feeds on itself. A nightmare for the bank of Canada. Once this begins, dropping interest rates might not have too much effect.

    • Max Heinz 1 month ago

      The shake up that is required.

    • Chè Kmate 1 month ago

      Dave, based on your comment, what do you make of Macklem’s comment which is opposite of what you state? He said, “House prices in Canada could rise faster than expected.”

      Thanks for your response in advance.

      • dave frazer 1 month ago

        Canadian and US Bond rates jumped 9 points again today. Interest rates may soon follow. Five, ten and 30 yr US bond rates are near 5 % and up 30 points in the last month. Does not look like a fall happening soon and Canadian rates are tied to them.
        If you have not noticed, gold is rising very fast against the US Dollar or should you say the dollar is being quickly devalued. To stop this devaluation, guess what. interest rates need to go up. Yes house prices might go up too, but you will shortly need a wheel barrow full of $ 10,000 dollar notes to buy one.

    • Rafik Samman 1 month ago

      I think you meant unemployment rises. But yes, this is the scenario that I’m dreading myself. This isn’t good at all… if they’re keeping the BoC rates because the yields aren’t stabilizing then it doesn’t matter what the BoC rate is, the banks will be raising their rates more to hedge against their losses.

  • robert cushing 1 month ago

    We are being misled. The overnight rate, bank rate, prime all of which figure in to mortgage rates are only partially directly affected by inflation. The prime consideration is the US rate; Canada’s rates are directly tied to the US rate because our economies are so closely aligned by free trade. Our rates are about 30 bps lower than the US yet historically our rates should be 50 bps higher, more or less, to prevent borrowers from selling $cdn and buying $US. Since our rates are too low we are seeing a slow erosion in our $cdn buying power vs the US. This leads to a lower cdn$ which will increase the rate of inflation imported due to free trade, and f alling gdp per person. Bit of a catch 22 now for Trudeau/ freeland and tiff.

  • Joey 1 month ago

    Catch 22 would happen without a doubt, IF immigration were stopped. Another recent article here just mentioned that our population has already grown by another one million since last year. There is no lack of buyers out there and the BOC knows it and knows that the minute it signals a rate cut is coming, the housing market will rocket to the moon. In the meantime, corporations are buying up what they can and those with cash are also buying properties without competition and with interesting “discounts” but still nowhere near pre-pandemic levels. I am in ON, and personally when I take a certain amount of money and go window shopping on House Sigma now and compare it with what what I could have purchased in 2020 and even in certain areas in 2022, that budget gets me less house. Prices continue to creep up on low-end to medium-end homes, the perhaps the most interesting finds are among the more expensive properties, which offer greater discounts as there are currently few and far buyers in this category. Also, location, location, location… there are pockets in Ontario, in particular east along the 401 line to PE County, that have never really come down in price and continue to thrive. Your average home in Cobourg (I mean a solid medium-sized house, not a POS), is now north of one million. Anything less is an older home in need of major TLC. Anything around Lake Scugog continues to go up in price, no correction there yet. Just insane prices in rural and small town Ontario and I don’t see the situation improving since so many Canadians (I emphasize the word Canadians) are fleeing toxic GTA and they are cashing in on pricey GTA properties that afford them anything they want in rural areas and thus propping up rural and small town prices. Then you have corporations buying up SFHs in the GTA and other popular towns and money is not an issue for them. Wall Street corps already own 25% of SFHs in the US and approx. 30% of ALL residential RE in the USA. They started buying up north of the border en masse two years ago. There is no stopping this trend. What you regular Joe cannot afford, corps can and will purchase and rent back out to them.

  • Vin 1 month ago

    I get that interest rate affect ability to qualify for/pay mortgages… but if rates increase by say 2% and house price decline by 10%… is this not better in the long run? How can we figure out the breakeven position between interest rates and potential price decline?

  • Jason Blum 1 month ago

    Of course it’s bad news. It’s Canada.

  • Leo 1 month ago

    what progress? you made none. jokestin trudeau is still dancing around

  • Randy Bozindki 1 month ago

    House prices will skyrocket soon when rates are back at zero.

  • Frank 1 month ago

    Considering BOC allots shelter costs into inflation, that in itself is problematic and if stripped away we are well under 2%. With the feds saying new home builds first time buyers can now get an insured 30 year mortgage, it seems as though our feds are working in tandem to keep the pressure on and will interpret any stats to suit the narrative , to get as many renewals at a higher interest rate. Nevermind that the feds put up a $30 billion dollar mortgage backed bonds that nobody wanted, so they printed more money to buy them themselves. Yup, Canada is in deep trouble.

  • BORIS Kondarassov 1 month ago

    collapse in Canada is coming, be prepared, great achievement, economy balance itself, nobody cares about amounts of water when it is fires everywhere, sounds similar enjoy the flights,

  • David English 1 month ago

    Wasn’t slowing down the economy exactly what they wanted to accomplish by increasing interest rates? Isn’t that the whole, entire point of it? Slow the economy to reduce demand and thus slow inflation?

    This talk is exactly that. They are talking DOWN the economy to reduce inflation. They are attempting to reduce expectations of increased prices. It’s no different than when they talk up the economy on the down-swings.

    Whatever…

    Demographics are the same: we’ve maxed out on immigration, the Boomers are retiring, and there’s going to be wage-driven inflation. If you want me to continue working, you’re going to have to pay more. If you don’t want a million international students a year, get your own coffee. It’s going to take a decade to roll out the robotics infrastructure that can properly support an older population.

    Sorry Boomers, GenX finally wins one.

  • raja 1 month ago

    Realters are increasing the house price by saying buyers about the reduce interest rates in future and create a fear in psychologically. If Bank of Canada reduced interest rates, again realters ruin the country’s economy.

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