Inflation has crept up again, marking an increase for the second consecutive month. Obviously, this is not what anyone wanted to see, particularly, the Bank of Canada. It was disappointing news; however, it was never expected for inflation to fall on a seamless downward path. It was always understood that there would be some bumps and bruises along the way. But that doesn’t make the uptick any less disappointing, and has definitely captured the attention of the economists, the Bank of Canada, and of course, mortgage lenders.  

Inflation has been the biggest problem and continues to be a thorn in our side. If it continues to remain ‘sticky’, then the BoC may have no choice but to hike their rate again.  

But what is the likelihood that they’ll need to hike their rate yet again?  

 

The Impact of the Inflation News on Rate Forecasts  

The forecasts from the big six banks suggest that the Bank of Canada is expected to reduce their overnight rate to a range between 1.00% and 1.75% by the close of 2024. This is what’s expected to happen. But given yesterday’s inflation report, it’s possible if not likely that these forecasts may need to be recalibrated.  As I’ve been cautioning for some time, we’re not out of the woods yet.  And yesterday’s report puts us a bit further into the forest.  

While things were looking promising, the disappointing inflation surprise has put the Bank of Canada is on the edge of their seats.  

The track record of economists’ predictions over the last few years have been off their mark.  Even last year at this time, four of the big six banks were expecting no hikes in 2023. The other two were expecting a hike in the first quarter, which they were right about. However, they were wrong about there being no further hikes for the year as we saw two more by mid-year.  

Three of the big six banks were forecasting that we would see cuts from the Bank of Canada in the last quarter of 2023. That of course didn’t happen, and here we are in 2024 and we’re still struggling with sticky inflation that could potentially push rates higher.  

If inflation rises again in the next two months, it’s almost certain that the Bank of Canada will be compelled to take an unexpected step – raising their rate once more. This was always a possibility, albeit a distant one. But now the possibility has become all that much closer.  

 

Fixed Mortgage Rates May Rise 

Regular readers of my blogs will recall that I’ve consistently emphasized how bond yields significantly influence fixed mortgage rate pricing. The yields had been trending downward since mid-October, which continued throughout the remainder of 2023. This led to fixed mortgage rates dropping by greater than 0.75% over that period. 

Since the beginning of 2024, there’s been a noticeable shift in bond yields, rising almost daily. This reversal in trend is an indicator of a reversal in market confidence. It suggests that the bond market may have started to question the trajectory of inflation, hinting at a growing uncertainty and a loss of confidence. Bond yields started spiking at the start of the week and are up another 4% today as I write. This week alone, bond yields have risen by 8.25% which is a considerable rise in just a few days. Since the beginning of the year, they are up by more than 11% 

Yesterday’s inflation surge supports the bond market’s diminishing confidence… as if the market was anticipating the disappointing news.  

The yields have now reached a level where it’s possible that we could see some lenders start to increase their fixed rates. If they continue to rise, fixed mortgage rate increases will be imminent.  

 

Reasons for Optimism 

While disappointing inflation news has everyone’s attention, it’s still too early to be hitting the panic button. We can all try to pretend we’re fortune tellers, which applies equally to economists and the Bank of Canada themselves, but the truth is that we really don’t know what’s going to happen.   

It’s possible that could see a large dip in inflation when the next report is released on February 20th. In which case, it would come as a huge relief. It wouldn’t necessarily mean that we can don our party hats, but it would be a step in the right direction.  

If the BoC has any doubts, then they will hike their rate again. Time and time again, they have made it clear that they are prepared to do just that should the need arise. And if inflation ticks up higher again, then that could be enough for them to sound the alarm and move forward with another hike. Fortunately, this is still not the expectation, however, it’s a growing possibility.  

 

Conclusion  

While yesterday’s uptick in inflation is concerning, the future is not yet known. We can choose to panic, or we can choose to remain optimistic. It has always been understood that there would be some bumps and bruises along the way. The drop in inflation wasn’t expected to a straight downward path.  

Let’s hope this is just a temporary blip and not something that’s expected to continue. But for now, anyone who currently has a mortgage coming up for renewal or has a new purchase closing in the next 120 days should get a rate locked in ASAP… just to be safe.  

As I always say… time will tell and anything can happen.