Fastened Mortgage Charges Are Rising. Are Variable Charges Subsequent?

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Numerous banks and other mortgage lenders have been raising fixed mortgage rates in recent weeks, following the lead of rising bond yields that are now at a two-year high.

And next week, all eyes will be on the Bank of Canada to see if it raises its overnight target rate earlier than expected, which would send variable mortgage rates higher by at least 0.25 percentage points.

In recent weeks, the following big banks have raised some of their special rates as follows:

  • RBC
    • 5yr fixed: 2.94% to 3.09%
    • 5yr variable: 1.65% to 1.70%
    • 2yr fixed: 2.49% to 2.64%
    • 3yr fixed: 2.69% to 2.84%
  • TD
    • 3yr fixed: 2.64% to 2.79%
    • 5yr fixed (high ratio): 2.74% to 2.84%
    • 5yr fixed (conventional): 2.84% to 2.94%
  • Scotiabank
    • All of its eHome rates by 10 bps
  • National Bank of Canada
    • 5yr fixed: 2.94% to 2.99%

Other mortgage lenders have been raising fixed rates as well, including First National, HSBC, Simplii Financial, Laurentian Bank, Tangerine and more.

Why? Government of Canada bond yields, which generally lead fixed mortgage rates, have been rising steadily and are now comfortably back at pre-pandemic levels, with the 5-year bond yield now at 1.70%.

Inflation a growing concern

The Bank of Canada’s assertion (up until recently) that elevated inflation will prove “transitory” is looking less likely.

Canada’s headline CPI growth rose to a 30-year high of 4.8% as of December, while core CPI rose to 2.93%, up from 2.73% in November.

And earlier this week we learned that a full three quarters of businesses are facing labour shortages and are planning to raise wages at a faster pace over the next 12 months, according to the Bank of Canada’s fourth-quarter Business Outlook Survey.

“Today’s inflation report…demonstrated that the BoC has no time to waste [in starting its rate-hike cycle],” TD Bank economists wrote. “Furthermore, there is a real risk that Canadian house prices will see another leg up given the still-low interest rate environment. Though the BoC has stated that housing risks are more the prerogative of the federal government, it knows that keeping interest rates low for too long increases financial stability risks.”

The latest interest rate forecasts

Forecasts for what the Bank of Canada may—or may not—do next week run the gamut from yet another rate hold, to the Bank shocking markets with a 50-bps hike in order to tackle inflation and runaway house prices.

Scotiabank, which for months had led the consensus forecast with its expectation of eight quarter-point rate hikes by 2023, has gone one step further and now expects 225-bps worth of tightening over the next two years, beginning with a 25-bps hike next week.

“The BoC would not tighten policy just because of housing, but housing pressures on top of ripping inflation change the equation,” writes economist Derek Holt. “Waiting to hike until April or later, and doing so tepidly, will be too little, too late and the BoC would risk wearing full responsibility for another massive gain in house prices, more investor activity than even what we’ve observed so far, and greater housing imbalances and future vulnerabilities.”

Holt added that mortgage rate commitments will start accelerating in the weeks ahead and carry on into an “environment of rising immigration, no supply and a rebounding economy.”

“Bringing forward rate hikes is the best medicine for attempting to engineer a soft landing,” he wrote. “Hard landing risks would rise if the BoC continues to look the other way while maintaining overly accommodative policy.”

Desjardins economist Hendrix Vachon, on the other hand, put out a research note on Wednesday entitled “Beware of Anticipating Too Many Interest Rate Hikes.” In it, he notes that interest rates work at the demand level, and that raising them would curb consumption and investment.

“This could still help lower inflation, but at the cost of an economic slowdown,” he wrote, adding that the impact would be even greater due to heightened debt loads and an increased sensitivity to rate hikes. “In the worst case scenarios, the combined impact of still weak supply and demand that is being curbed by several interest rate increases could precipitate another recession in early 2023.”

Bond markets are now pricing in an 86% chance of a 25-bps rate hike at next Wednesday’s rate meeting, with a slight chance of a 50-bps hike.

“Even with one of the ‘milder’ inflation rates in the G7, the stage is nevertheless set for the Bank of Canada to soon kick into tightening gear,” noted BMO chief economist Douglas Porter. “Our view is that the Bank will tee up a March move at next week’s meeting, although we cannot rule out more immediate action (and the market is leaning heavily that way).”

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