Before we can expect to see the ever so desired rate cuts to become realty, inflation has to fall. It was always expected that there would be some bumps along the way, and yesterday, we hit yet another one. The inflation report form the US was released which was up 0.30% in January, higher than what economists were expecting. You don’t need me to tell you that this is the opposite direction of what everyone was hoping to see.  

Does this mean that the expected cuts from the Bank of Canada will be delayed?  

The Bank has said repeatedly that they are not prepared to lower their rate until they are certain that they will reach their inflation target of 2%. If inflation doesn’t come down as expected, then we can expect rates to remain at elevated levels. All six of the big six banks were forecasting for the BoC to cut their rate in the 2nd quarter of this year… which begins in only six weeks. While it’s still too early to say if cuts will be pushed out, this is reason to be less optimistic. I’ll be watching the forecasts closely and will report any updates in upcoming blogs.  

 

Fixed Mortgage Rates are Increasing  

Bond yields reacted to yesterday’s inflation report with an immediate upward spike. The yields had already been on an upward trend, which I would say were in the danger zone for potential fixed rate increases. The news moved them further into the red zone which has now pushed a few mortgage lenders to increase their fixed rates by around 0.10%.  

The good news is that the yields pulled back today, which could indicate that the market was overreacting to yesterday’s news. However, it’s still too early to say.  

 

Market Uncertainty and Risk 

Nothing is certain in the financial world, and forecasts are always changing. Many are aware of this, which is why the majority of people are still hesitant on pulling the trigger with a variable rate mortgage. As I mentioned in my blog last week, it’s possible that you could come out ahead, and quite nicely if the cuts come through as expected. But if cuts are pushed out, then a variable rate could be an expensive choice. The same logic can be applied to 1 year fixed rate mortgage rates.  

 

Conclusion

It’s still possible that we could see the Bank of Canada cut their rate this spring, but it’s contingent on inflation continuing its downward trend. This has always been the situation and is what the forecasts have been relying on. If inflation continues to remain sticky, then the cuts will be pushed out. They’ll have to be.  

The longer inflation remains elevated, the longer we’ll have to cope with the higher rates of today. At least, fixed rates have fallen well off their highs reached last fall. At least for now.  

As I’ve mentioned before, the economists have been well off the mark over the last few years. But at least we’re getting closer. And eventually, the rates will fall. It’s just a matter of when.