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When will fixed rates go down in Canada?
June 16, 2023 | Posted by: Andrew Wade
When will fixed rates go down?
Most lenders in Canada, are currently increasing their fixed mortgage rates to catch up to increasing yields we have seen the past few weeks now. Fixed rates will continue to go up and maybe down by a minute amount we expect over the next few weeks. May's inflation numbers which come out June 27 may bring down rates, but don't hold your breathe there!
Fixed rates are tied to Canadian bond yields — the market is seeking direction and is easily pushed around by the next economic factor, such as job numbers, the inflation rate, oil price changes, or U.S. bank instability.
In fact, fixed rates aren't usually this volatile. These fluctuations reflect the mayhem caused by the pandemic and resulting home-buying fervour, and right now, the world is trying to get market conditions back to some state of normal. We're not there yet, so I don't expect fixed rates to be stable or headed in just one direction.
For the rest of 2023? If the Bank's policy rate stays status quo, I see room for at least a 0.50% decline in fixed rates as the year plods along, but they won't stray much further until the Bank of Canada starts cutting its policy rate in earnest.
What can affect BoC's rate decisions?
Our central bank would rather avoid further rate increases after such a fast tightening cycle, hoping to see convincing numbers of a slowing economy to stay on the sidelines:
- April's inflation numbers increased to 4.4% (March was 4.3%), the first acceleration since June 2021 and higher than the expected 4.1% (next reading on June 27)
- Job numbers for May were down slightly (-17K) with the unemployment rate ticking up to 5.2% (next reading July 7), finally showing signs of cooling
- Average wage costs for May are at 5.1%, a still-concerning sign of entrenched inflation
- March's Canadian GDP (Gross Domestic Product) is unchanged from February, though Q1 2023 rebounded with unexpected growth of 3.1% compared to a lacklustre Q4 2022
- Canadian bond yields have been on the rise, trying to anticipate if another hike is coming
Will financial antics in the U.S. affect rate hikes here?
Recent U.S. volatility has pressured both countries' central banks to carefully consider any further rate increases as the rapid rate-tightening cycle reverberates, pushing hidden economic fractures into the light.
A soft landing is a magical thing.
I think all the numbers and rate hikes could still come together to produce a softer economic touchdown — with no recession or a mild one at the most. The market resilience we've seen may actually work to keep our economy out of the red.
Canadians would (mainly) keep their jobs, though the unemployment rate would presumably normalize from current lows. Inflation would come down, and home prices would normalize.
Some economists would call that magic, especially amid all the market turmoil and concerns that financial policies could push already-tight budgets over a cliff.
Does the bond yield 'curve inversion' mean we'll experience a recession? I see a different reason.
I agree with economist Campbell Harvey that the inversion may simply be anticipating lower interest rates as a result of declining inflation, rather than a forced drop due to a recession. Companies are already adjusting to avoid that scenario (i.e. increasing capital as a buffer, slowing hiring and wage growth now).
However, if the Bank of Canada continues to post more hike rates, it could tip our economy too far to land with a hard (recessionary) thud. It would come with better news for mortgage rates, as the bank would finally have good reason to back down, perhaps quickly, providing some rate relief when we'll likely need it most.
Be on the lookout for a 'rolling recession.'
There's another possibility for the Canadian economy — a rolling recession. The U.S. has seen certain sectors contract since the end of 2022, and sectors here, such as manufacturing and accommodation and food service, are seeing enough slowdown on the horizon that could spell periods of recess. Yet, other sectors are showing strength, such as technical services, mining and the public sector. Or, certain Canadian centres may see a more pronounced contraction than others.
True North Mortgages
Dan Eisner
Jun. 09, 2023
https://www.truenorthmortgage.ca/blog/2023-mortgage-rate-forecast
