While fixed mortgage rates have fallen off of their 14 year highs we saw back in the fall of 2022, they are now facing upward pressure once again. Bond yields are one of the key factors involved in fixed mortgage rate pricing. As the yields have been rising precipitously since early May, mortgage lenders may soon be forced to increase their fixed rates. If the upward trend continues, then fixed rate increases will be imminent. It’s almost to that point right now.

While the Bank of Canada has eight scheduled rate announcements per year, there is no set schedule for fixed rates which can move at any time. We could see fixed rate increases over the next week if not sooner. Mortgage lenders are watching the bond yields closely with their finger on the trigger. Anyone with a purchase closing, or a mortgage coming up for renewal within the next 120 days should get a rate locked in ASAP.

 

Inflation and its Effect on Mortgage Rates

Bond yields are volatile and can be driven in one direction or another by a single piece of news. In this case its inflation, which rose 4.4% year over year in April when the market was expecting it to come in at 4.1%. Following ten months of inflation deceleration, this was the first trend reversal since inflation peaked at 8.1% in June 2022.

The increase was largely due to rising gas prices and higher interest as more people are now renewing their mortgages at today’s higher rates.

The increase was disappointing and not what the Bank of Canada was hoping for. Or anyone else for that matter.

The tight labour market also remains a concern. Unemployment is at a record low, which pushes wages higher and therefore drives inflation.

 

Is the Higher Inflation Just a Temporary Blip? 

Even the best performing stocks will have ups and downs during a streak. The same can be said for inflation. While the increase has caught the attention of the Bank of Canada, it doesn’t necessarily mean that they are sounding the alarm. It’s too soon to tell if we’ll see changes to the current forecasts.

Five of the big six banks are expecting the Bank of Canada to start cutting its rate in the first quarter of 2024. The maverick is National Bank, who believes it will come in the fourth quarter of 2023. 

Four of the banks, CIBC, National Bank, RBC and Scotiabank are all forecasting 1.50% in cuts by the end of 2024.

TD is a bit more optimistic with a prediction of 2.00% in cuts.

BMO is on the other end of the stick, forecasting 1.00% in cuts by the end of 2024.

These forecasts have not changed much since the summer of 2022. It will be interesting to see if any changes are made over the next couple of months. Time will tell.

 

The Bank of Canada’s Rate Cut Forecast

The Bank of Canada has made it very clear that they will not be cutting their rate until they have reached their inflation target of 2.00%. They are currently expecting this to happen by the end of 2024. As you can see, they are not quite as optimistic as the big banks.

 

Conclusion

The possibility of a rate cut in 2023 continues to diminish. It’s possible that the first cut won’t come until later in 2024 as the BoC is forecasting. There is also no guarantee that it won’t get pushed out to 2025. I remain hopeful that we’ll see a cut in the first half of 2024, but that hope is fading. A lot still must happen before we see inflation come back down to 2%. As long as inflation remains at elevated levels, then rates will remain higher.

Time will tell and anything can happen.

You can read all the details on yesterday’s inflation report here. I would also recommend reading the following of my recent blogs:

The Effect of Higher Rates at Renewal

Can We Expect The Bank of Canada to Cut Rates This Year?

How to Choose Between a 1, 2 or 3 Year Fixed Mortgage Rate

Should Variable Rates Be Considered in Today’s Market