What the Latest US CPI Numbers Mean for Mortgage Rate Cuts in Canada

What the Latest US CPI Numbers Mean for Mortgage Rate Cuts in Canada

Canadian bond yields are surging, and mortgage rates are expected to climb ahead of the spring market. This is due to today’s stronger-than-expected inflation data from the US, causing a sudden jump in yields.

Why It Matters 

The rise in bond yields is expected to drive mortgage rates higher, reversing some of the ground made over the past few weeks. This could impact the Canadian real estate markets, which have recently seen a boost in buying activity due to cheaper financing. While Canadian and US economies are closely tied, any increases in the Consumer Price Index (CPI) stateside can push CPI here.

Details

The 5-year Government of Canada (GoC) bond yield has rapidly risen. It touched a low of 3.635% and a high of 3.716% on Tuesday. Over the past week, the rate has climbed 0.2788 basis points and as much as 40.57 basis points over the last month, mainly due to surging labour and inflation data on both sides of the border. 

The Bureau of Labor Statistics reported on Tuesday that the growth rate of U.S. prices had decelerated in January. For all items, excluding food and shelter, the index still rose 0.3%. Over 12 months, the rate dropped from 3.4% to 3.1%. When food and gas prices are excluded, the “core” price growth remained unchanged at 3.9% compared to December. Despite the continued downward trend in price growth last month, the January data did not meet economists’ expectations for a more significant slowdown. Before the report, economists had predicted a rate of 2.9%. They also anticipated a lower “core” rate of 3.7%.

Yes, But 

Despite the surge in treasury yields, the Bank of Canada (BoC) has yet to suggest timing for a cut in its policy rate, which influences variable interest products. The 5-year government bond has been on a slide, peaking back in October, which has helped lower the cost of 5-year fixed mortgage rates.

The Big Picture

A 5-year fixed rate mortgage is nowhere near as cheap as those seen pre-pandemic in the mid-2% range. However, in a market that is so highly speculative, there has been a tendency to buy whenever low-cost financing becomes available. The lower rates contributed to the recent recovery in home sales in January. Stocks sank on both Bay Street and Wall Street when markets opened today. The Canadian dollar fell the most in 11 months on the US inflation report. Even gold was down based on this news.

What’s Next

It’s no surprise that mortgage rates are headed in a different direction. The driving forces behind this shift are robust economic data and lingering inflation worries. While there’s lingering concern that the country may already be in recession, headline data suggests otherwise. It’s important to note that rates never travel down in a straight line. There could be many bumps along the way, as moving the inflation dial from 3% to 2% is usually the toughest.

The Bottom Line

The uncertainty regarding when inflation due to sustained economic growth will translate into higher government bond yields; thus, higher mortgage rates could be expected in the coming days as the bond market adjusts its expectations of central bank rate cuts on either side of the border. This could significantly affect the Canadian real estate market and potential homebuyers. If you’re considering your mortgage strategy, it’s advisable to lock in your rate before further changes upset your mortgage qualifying amount.