How Will High Inflation Affect Mortgage Rates

Canada’s inflation rate has recently touched the highest it has been in more than a decade. If this trend continues it will have a direct effect on the homeowners as it may signal rate hikes too.

In July the inflation stood at a whopping 3.7%, according to data released by Statistics Canada. This is the third consecutive monthly inflation rise that stood over and above the Bank of Canada’s neutral range i.e. 1.75% - 2.75%. In other words, this range denotes the required range for backing the economy with full employment and tamed inflation. The Bank of Canada, however, believes that the higher prices of consumer goods are a temporary phenomenon, resulting in the economy recovering after the slump caused by COVID-19. In a statement, the Bank of Canada said, “…inflation is likely to remain above 3% through the second half of this year and ease back toward 2% in 2022, as short-run imbalances diminish and the considerable overall slack in the economy pulls inflation lower,” the BoC said following this week’s rate decision. “The factors pushing up inflation are transitory, but their persistence and magnitude are uncertain and will be monitored closely.”

According to the Bank of Canada Governor Tiff Macklem, things seem under control as of now as stated in his column for the Financial Post. In his column, he wrote, "The Bank of Canada remains firmly committed to keeping inflation low, stable, and predictable. Even with the gyrations caused by the pandemic, inflation has averaged pretty close to target through the past few years to today. You can be confident that we will keep the cost of living under control as the economy reopens. The pandemic has taken lives and livelihoods and pummelled our economy. The Bank of Canada was there to prevent deflation when the economy plunged. We remain just as determined to secure a complete recovery and keep inflation under control."

This brings us to the concern about almost imminent rate hikes. According to the Bank of Canada, the rates are unlikely to be hiked before the second half of next year. The statement from BoC for the July rate meeting read, "We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainability achieved. In the Bank’s July projection, this happens sometime in the second half of 2022"

Economists are of the opinion that in the event of a hike in the mortgage rates will definitely impact the purchasing power of people. But the borrowers, especially those who have fixed-rate mortgages have no reason to worry about the rate hikes, at least not till their mortgage is due for renewal or in the scenario that they opt to refinance their mortgage. If the prime rate increases, it would signal higher payments each month for the borrowers who have variable-rate mortgages.

If you are anxious about inflation and its effect on mortgage rates and need any advice on home buying, do write to us at LendX.