rates
04. rates Interest rates continue to be supportive of economic and housing market activity, and this may be even more true by the end of 2019.
GUESSING THE FATE OF INTEREST RATES
Beginning in the middle of 2017, interest rates began an 18-month climb which, until recently, was expected to continue through 2019 and beyond. The era of cheap money supposedly ended when the Bank of Canada embarked on a campaign of measured increases in its overnight target rate, taking it from 0.5% in July 2017 to 1.75% by Q4 2018. In part this was a response to the rising annual rate of inflation, which increased from 1% in mid-2017 to 3% just over 12 months later, but since then it has subsided to 2%. Accompanying this deceleration in inflation has been a moderation in consumer spending, a normalization of housing markets across the Canada, slowing employment growth, and a downgrade in the outlook for economic growth over the next few years, in part due to a number of ongoing international trade disputes. In statements made on March 6, 2019, Bank of Canada governor Stephen Poloz indicated that going forward, rate changes (up or down) will hinge
on “developments in household spending, oil markets, and global trade policy.” Markets continue to price in a relatively small chance of the overnight rate being cut in the coming months, so it will be instructive to follow the evolution of the Bank’s key economic indicators over time. Not waiting for central banks to make the first move, the dynamics in bond markets have changed significantly since Q4 2018, resulting in declining yields. Five-to-ten- year Canadian government bond yields in particular—which strongly influence the interest rate banks offer on fixed-rate mortgages—have fallen by 2% in the past few months. Looking ahead through the balance of 2019, we think it most likely that interest rates will remain where they are today, with a reduction certainly in play. Regardless, the change in the trajectory of the interest rate outlook more generally points to a continued supportive lending environment.
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