Last week’s inflation update from the U.S. was a bit of a letdown, casting a shadow over the prospect of a rate cut before the summer’s heat sets in. For those cuts to materialize, we’re banking on a steady decline in inflation rates. As the Canadian economy is closely tied to our friends to the south, negative news from their end tends to echo through our halls as well. 

Economists on this side of the border were anxiously awaiting the Canadian inflation report which was released yesterday. Fortunately, it came back better than expected, giving us a reason to become much more optimistic. This is exactly what we wanted to see. It’s the kind of news that feels like finding an unexpected shortcut right when you thought you’d be stuck in traffic. 

Does this mean that the rate cuts are just around the corner?  

Economists were expecting inflation for January to come in at 3.3%, but the actual number blew this away at 2.9%. This was largely fueled by the deceleration of gas prices (yes, that pun was fully intended).  

While the news is promising, it’s a bit early to start doing backflips off your couch to express your excitement. It’s just one report.  We need to see a sustained downward trend in inflation before we can start getting excited. The Canadian inflation report for February is expected on March 19th. If we see another drop, then further boosts the odds of a rate cut by summer.  

 

The Latest Forecasts from the Big Six Banks 

Bank  Q1  Q2  Q3  Q4  TOTAL 
BMO  n/c  -0.25%  -0.25%  -0.50%  -1.00% 
CIBC  n/c  -0.25%  -0.50%  -0.50%  -1.25% 
National Bank  n/c  -0.25%  -0.50%  -0.50%  -1.25% 
RBC  n/c  -0.25%  -0.25%  -0.50%  -1.00% 
Scotia  n/c  n/c  -0.25%  -0.50%  -0.75% 
TD  n/c  -0.50%  -0.50%  -0.50%  -1.50% 

 

While it’s not quite as aggressive as their forecasts from January, they are still promising with 5 of the big six banks still expecting cuts in the 2nd quarter this year.   

The next rate announcement from the Bank of Canada is scheduled for March 6th. While the chances of a cut on this date are not zero, it’s not likely or expected.  

The following scheduled announcement is on April 10th when some economists were predicting a cut. I personally think this may still be a bit early, but we’ll see. This date only allows for the release of one more Canadian inflation report. If it drops again, then a cut on this date is possible. However, I think a cut on the following announcement date of June 5th would be more likely.  Again, that’s if inflation continues to fall.  

 

Choosing the Right Mortgage Product  

Fixed mortgage rates are expected to drop ahead of the Bank of Canada announcement. While bond yields dropped after yesterday’s release of the Canadian inflation report, they are back up again today. Despite the good news, there is still a lot of uncertainly. The US inflation report was higher than expected, as was the previous Canadian report for December. Anything can happen. But once it becomes clear that the cuts are coming, bond yields will then start to fall… taking fixed mortgage rates along for the ride.  

The 3-year fixed remains the most popular mortgage product. It has the right combination of lower rate and shorter term. Variable rate mortgages remain substantially higher than fixed rates. The combination of economic uncertainty and higher rates continues to make people feel uneasy about choosing a variable rate mortgage in today’s market.  

This is the same reason why people are staying away from 1-year fixed mortgages.  

For more than a year, we’ve been getting people asking them. However, they remain the most expensive mortgage products.  

While it’s possible that you could come out ahead with a variable rate or 1-year fixed rate, it’s a bit too much of a risk for many to take the chance given the substantially higher rates.  

 

The Real Estate Buying Opportunity 

While real estate values have dropped substantially off their 2022 highs, it will eventually return to set new all-time highs. The demand for real estate has dropped. It’s still there… but waiting on the sidelines, ready to pounce as soon as mortgage rates start to fall. And when they do, the pent-up demand will to return in full force, sparking a real estate buying frenzy.   

Higher rates have kept people at bay… but it’s just a matter of time before it returns. And when it does, demand will soar… along with home values. It will be 2021 all over again.  This will not be a fun time for homebuyers.  

I explained this in detail in my recent blog on the Trap of Waiting for Lower Rates to Buy a Home. The opportunity is now.  

 

Conclusion

Following inflation is like riding a roller coaster. Last week’s US inflation report was concerning, so we have to be grateful that the Canadian report came in strong yesterday. If this continues into March and April, then the cuts will be all but imminent. However, until then, it’s all speculation and anything can happen.