Gut Punch from the Bank of Canada

October 12, 2022 | Posted by: Harold Hagen


Last Thursday, Bank of Canada Governor Tiff Macklem gave a speech, quite simply titled, “Restoring price stability to Canadians”. I won’t bore you with the entire speech, but there were a couple of bullet points that I think everyone should pay attention to in terms of how this is going to impact the mortgage industry and economy.


1)    Our economy is in excess demand:

From Tiff’s speech:

“[...] High inflation is making life more difficult for Canadians, especially those with low or fixed incomes. Some of this inflation reflects global developments that we don’t control, but inflation in Canada increasingly reflects what’s happening in Canada. Businesses are having a hard time finding enough workers …”


“[...] inflation will not fade away by itself. To get it back to more normal levels, we need to slow spending in the economy so supply can catch up with demand.”


This is the first explicit admission that Canada’s inflation is indeed an excess domestic demand story. Tiff is telling us clearly that this is not a Russia/Ukraine or China manufacturing or global shipping story. This is a story of an overheated economy, drunk on policy rates that are still too low. This is another reason to expect the next Bank of Canada rate announcement could result in an increase on October the 26th.


2)    Some relief, but not enough:

This suggests the Canadian economy has moved in the right direction to ensure inflationary pressures have started to decrease, but we’re not there yet. The Bank of Canada was not mincing words here: “… the clear implication is that further interest rate increases are warranted.” With those words, the Bond yields ripped higher with 5-year rates closing in on the June highs, and many mortgage Lenders immediately increasing Fixed rates across the board.


3)    Housing slowdown is proceeding as planned:

In 5 successive steps since March 2022, the Bank of Canada increased the overnight lending rate from 0.25% to 3.25%. This has been one of the steepest tightening cycles ever conducted by the Bank of Canada. They are clearly aware that a housing slowdown occurring and that it is happening according to plan. They are also saying they have no plans to stop rate increases on the 26th of October.


Key takeaway: We should not be surprised to see another Bank of Canada rate increase on October 26. Of course, that will affect adjustable and variable rate mortgages.

But what about the bond market? The bond market has already spiked to the news. Spikes tend to lead to rate increases if they don't subside. And we don't think they're coming back down.


If you have questions or need advice, feel free to book a call in our calendar here so we can discuss your unique situation.

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