Fixed mortgage rates are rising. Are variable rates next?

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Many banks and other mortgage lenders have raised fixed mortgage rates in recent weeks, following the lead of rising bond yields which are now at two-year highs.

And next week, all eyes will be on the Bank of Canada to see if it raises its overnight rate target ahead of schedule, pushing variable mortgage rates up at least 0.25 basis points. percentage.

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

  • RBC
    • 5-year fixed: 2.94% to 3.09%
    • Variable 5 years: 1.65% to 1.70%
    • 2-year fixed: 2.49% to 2.64%
    • 3-year fixed: 2.69% to 2.84%
  • TD
    • 3-year fixed: 2.64% to 2.79%
    • 5-year fixed (high ratio): 2.74% to 2.84%
    • 5-year fixed (conventional): 2.84% to 2.94%
  • Scotiabank
    • All its 10 bps eHome tariffs
  • National bank of Canada
    • 5-year fixed: 2.94% to 2.99%

Other mortgage lenders have also raised fixed rates, including First National, HSBC, Simplii Financial, Laurentian Bank, Tangerine and many others.

Why? Yields on Government of Canada bonds, which typically lead fixed mortgage rates, have risen steadily and are now comfortably back to pre-pandemic levels, with the 5-year bond yield now at 1.70% .

Inflation, a growing concern

The Bank of Canada’s assertion (until recently) that high inflation will prove “transient” seems less likely.

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

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

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

The latest interest rate forecasts

Predictions of what the Bank of Canada might — or might not — do next week run the gamut, from another rate hold to the Bank shocking markets with a 50 basis point hike to combat inflation and soaring house prices.

Scotiabank, which for months had topped the consensus forecast with its expectation of eight quarter-point rate hikes by 2023, went further and now expects a 225-point tightening. basis over the next two years, starting with a 25 basis point increase. next week.

“The Bank of Canada wouldn’t tighten policy just because of housing, but real estate pressures on top of skyrocketing inflation are changing the equation,” he added. writing economist Derek Holt. “Waiting for the upside until April or later, and doing it halfheartedly, will be too little, too late, and the BoC risks taking full responsibility for another massive gain in house prices, more than investor activity than even what we have seen so far, and greater housing imbalances and future vulnerabilities.

Holt added that mortgage rate commitments will begin to accelerate in the coming weeks and will continue in an “environment of rising immigration, lack of supply and a recovering economy.”

“Advancing rate hikes is the best medicine to try to stage a soft landing,” he wrote. “Hard landing risks would increase if the Bank of Canada continues to look the other way while maintaining an overly accommodative policy stance.”

Desjardins economist Hendrix Vachon issued a research notes Wednesday entitled “Beware of anticipating too many interest rate hikes”. He notes that interest rates operate at the level of demand and that raising them would slow down consumption and investment.

“It could still help reduce inflation, but at the cost of an economic slowdown,” he wrote, adding that the impact would be even greater due to the increase in indebtedness and increased sensitivity to rate hikes. “In the worst-case scenario, the combined impact of still weak supply and demand, dampened by several interest rate hikes, could precipitate a new recession in early 2023.”

Bond markets are now pricing in an 86% chance of a 25 basis point rate hike at next Wednesday’s rate meeting, with a low probability of a 50 basis point hike.

“Even with one of the ‘mildest’ inflation rates in the G7, the stage is nonetheless set for the Bank of Canada to kick into high gear soon,” noted BMO Chief Economist Douglas Porter. . “Our view is that the Bank will initiate a move in March at next week’s meeting, although we can’t rule out more immediate action (and the market is tilting heavily that way).”

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