Inflation in Canada has roared back with a vengeance, akin to a dragon-breathing fire, reaching an annual rate of 4.0% in August 2023, a significant jump from July’s 3.3%. These numbers have sent shockwaves through the economy, particularly in the realm of mortgages and interest rates. As a Calgary Mortgage Broker I will try to explain what is happening and what this means to you.

The Inflation Landscape

Annual Inflation: The annual inflation rate surged to 4.0% in August, up from July’s 3.3%, exceeding the consensus of 3.8%. This increase has surpassed the Bank of Canada’s 2% target and poses a critical challenge for policymakers.

Monthly Inflation: On a month-over-month basis, inflation rose by 0.4%, higher than the predicted 0.2%. This uptick indicates a sustained upward pressure on prices.

Contributing Factors: The main culprits driving this spike in inflation were crude oil prices, reaching an 11-month high near $93 per barrel. Additionally, mortgage interest costs played a significant role, reflecting the lagged reaction to the Bank’s rate hikes in June and July that I discussed on my Calgary Mortgage Broker video blog

Market Response

The market responded swiftly to the alarming inflation figures. Canada’s 4-year swap rate, a leading indicator for fixed mortgage rates, surged by 10 basis points. This rise in interest rates could directly impact mortgage holders and potential buyers.

The likelihood of a Bank of Canada (BoC) rate hike in October doubled to 41%, and markets are now fully pricing in another hike by Q1 2024. This indicates a shift in monetary policy, with the BoC considering further rate hikes to combat the rising inflationary pressures.

The 5-year Government of Canada Bond Yield jumped today with this new data by about 15 basis-points. This could lead to a prolonged period of elevated rates, and may trigger a 5-year mortgage rate increase if this increase sustains.

Implications for Mortgages in Calgary and Canada

The soaring inflation rate and the subsequent increase in interest rates have immediate implications for mortgages. Borrowing costs are expected to rise, impacting both existing and potential mortgage holders. If the BoC proceeds with another 25 basis points hike, it’s anticipated to happen sooner than later. The likelihood of an October rate increase is now pegged at about 41%, which is twice as high as it was a week ago.

The housing market, already affected by rising prices, may face additional challenges with increased mortgage rates. Prospective homebuyers might find it more challenging to afford homes as mortgage rates climb, potentially slowing down the housing market.

Economic and Policy Responses

Analysts and experts are closely monitoring the situation, emphasizing the need to remain vigilant and follow the evidence. Some argue for leaving the door open to further rate hikes, given the persistent inflationary pressures.

The Canadian government is actively engaging to address the housing crisis, presenting legislation aimed at boosting rental property construction to alleviate the housing crunch.

Conclusion

The August 2023 Stats Canada Inflation Report has set off alarm bells in the financial landscape, particularly impacting mortgages and interest rates. With inflation exceeding the Bank of Canada’s target, the possibility of further rate hikes looms large. As mortgage rates rise, it’s imperative for consumers to assess their financial positions and prepare for potential changes in borrowing costs. Staying informed and adapting to evolving economic circumstances will be crucial in navigating this challenging landscape.