July 2023 Inflation Watch

July 25, 2023

Key points:

  • Headline CPI beat expectations, coming into the target range at 2.8%.
  • Core inflation has barely budged, which is why the Bank of Canada hasn’t let up on rate hikes.
  • Five-year fixed rate mortgages have some of the lowest rates right now.

July 2023 inflation watch

In this July 2023 inflation watch video, I discuss the current inflation trends here in Canada. We review headline CPI and core inflation, interest rate hikes, and mortgage rates. Here’s what you should know.

Don’t feel like watching? Find the full transcript below!

Chris: [00:00:00] Welcome to your July edition of Inflation Watch. My name is Chris Molder. I am a Toronto mortgage broker. I do these videos for educational purposes to help you understand Canadian mortgage interest rates better, how we got to where we are and perhaps where we’re going in the future. If you like this content, please consider subscribing. Drop me a comment, let me know that you’re enjoying the content so I can continue to make more for you. Let’s jump right in.

Headline CPI is down, but core inflation is struggling

Chris: [00:00:27] The most exciting news this month was headline CPI. It came in beating estimates at 2.8%. The market expected 3%. It beat those estimates and it puts CPI or the inflation figure right into the target range that the Bank of Canada is looking for of 3% to 1%. So we’re now in the range. We’re in the ballpark and you would have expected that on the news there would have been huge reaction to the market. Interest rates should have started to trend down, especially bond yields. But let’s take a look at the bond market. They barely moved five basis points on Tuesday. You can see the CPI read. I’ve indicated it here on the chart. There was a temporary blip that happened and then they basically went flat. There wasn’t much movement after that. And we should have anticipated a very serious drop to the bond yield after that news. But it stayed stuck. So why is that? What’s the reason why there was no happy dance or victory dance being expressed by the markets?

Chris: [00:01:33] The reason why is because core inflation barely budged. As you can see from this chart, the blue line, that’s total CPI, that’s the 2.8%. So the gray area in this chart is the target range of the Bank of Canada. We’re in it. Thumbs up, we’re good. But when you look at the red, green and yellow lines, you can see that they’ve barely made any progress from May to June. In fact, they only decreased by 0.01%. And so this is where the comment about inflation staying sticky, you hear that in the headlines, comes from.

Chris: [00:02:12] And it’s for this reason that the Bank of Canada won’t let up on raising interest rates until they’re satisfied seeing that core inflation is coming down. And so on July 12th, which was before this CPI read in all, all fairness. But on July 12th, the Bank of Canada raised the prime rate another quarter of a percent to 5% for the overnight lending rate. And that pushes the prime rate to a 22 year high water mark. And what’s interesting and being debated right now is really how tight lipped the Bank of Canada is. They are not providing any forward guidance. They’ve done that in the in the past in early January, saying that they’re going to do a temporary hold and that created speculation in markets, especially real estate. We saw that run up in real estate. And so this time around, the Bank of Canada is staying tight lipped. They’re not saying a word about what they expect to happen. They’re just shrugging their shoulders and saying, we’ll see, depending on the data, which is probably the right approach from the Bank of Canada at this point.

Market anticipations and mortgage rates

Chris: [00:03:19] But of course, you want a crystal ball, you want predictions. And so I’m not going to give you mine. But I’ll tell you what the market is anticipating after the latest read. This is just a tool for implied short term probabilities of Bank of Canada moves based on banker acceptance notes. And what it’s showing is that the market is pricing in a 21% chance of an increase to the prime rate up till September, 37% chance up until December and then into March of next year, 21% chance of cuts. So that means if it’s 21% chance of increasing, it’s really a 79% chance of hold. And so the way to read this chart is that the market is anticipating more likelihood of a hold to the prime rate until we get into summer of next year of 2024.

Chris: [00:04:16] As far as current mortgage interest rates are concerned, five year fixed is among the lowest at the moment. Pricing wise, not sure that that’s really the right direction to go knowing that rates are going to drop in the future. But you’re able to find about five and a quarter for insurable mortgages, meaning less than 20% down in insurance premium paid and for uninsurable mortgages, the lowest that we’re seeing is 5.89%. The three year fixed, which was and is the most popular product in term right now, is quite elevated for insurable. It’s 5.84% and uninsurable, which is for most people, the mortgage that they would get. It’s over 6%.

Need more help or information?

Chris: [00:05:02] Thank you for sticking with me until the end of this video. If you found any value in today’s content, please consider liking or subscribing. And if you have any questions about how all this information impacts you, your mortgage, how to make decisions around your mortgage, I’m just a phone call or an email away. Till next time. Bye for now.

If you’d like to discuss your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.