March 2023 Inflation Watch

March 30, 2023

Key points:

  • Inflation continues to trend downward. Headline inflation hit 5.2%, and while core inflation is experiencing a more gradual decline, we are still moving in the right direction.
  • The Silicon Valley Bank and the Federal Reserve in the United States are influencing trends here in Canada.
  • Assuming there are no major disruptions, the overnight and prime rates should hold steady throughout 2023.

March 2023 inflation watch

In this video, I go into detail about Canada’s inflation numbers for March, and what they mean for our interest rates in the rest of 2023. I also discuss how our relationship with the United States plays a role in how things might unfold.

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

Chris: [00:00:00] Welcome to your March 2023 edition of Inflation Watch where I do a deeper dive into analysis behind the factors that influence Canadian mortgage interest rates.

Inflation continues to trend downward

Chris: [00:00:13] On March 21st, Statistics Canada released the inflation information for the month of February in Canada, and again the inflation numbers came in beating expectations. Headline inflation was down to 5.2, which you can see here in this chart. The previous chart showed headline inflation or headline CPI, but the Bank of Canada dives a little bit deeper and uses three other measures called CPI Trim, CPI Median and CPI Common. And this chart shows the blue line is the headline inflation that I showed you previously. So down to 5.2% over here. But when we look at the core inflation measures, the other three are commonly called core measures. You can see that they’re not decreasing as dramatically. They’re a little bit more flat. But more recently, this yellow and green line has trended downward, going in the right direction. And it feels and looks like we are trending downward, which will be a relief for the Bank of Canada.

Chris: [00:01:14] At the beginning of March, the Bank of Canada delivered their interest rate decision, maintaining the rate unchanged at 4.5%, which you can see here on this chart. And what the remainder of the chart is showing is the forecast of the predicted path that the Bank of Canada will take over the next 12 months. And the gray line that you can faintly see here suggests that the Bank of Canada will maintain the overnight lending rate unchanged at 4.5%, and then will start to decrease as of January 2024. Now, this is the forecast. All things equal based on the path that Canada is currently on.

Our relationship with the United States

Chris: [00:01:57] Now, up until this point, we’ve focused on the Bank of Canada and policy rate, right? That’s what determines the prime rate that influences variable rate mortgages. But what about fixed rates? Fixed rates are driven and determined primarily by the direction of bond yields, and bond yields are influenced by expectations, future forecasted expectations of the market. This is the chart for the Government of Canada. Five year bond yields stretched out over the past three months. You can see at the beginning of March we were well over 3.5%. And then we see this dramatic decline that happened very quickly. And currently we’re well under 3%, kind of fluctuating below 3%. So what was it that happened a few weeks ago that would have influenced the bond yield so dramatically? Hint it was not the Canadian CPI numbers coming in better than expected. It has a little something to do with a bank called Silicon Valley Bank and the ensuing bank run, which changed the profile of or expectations for bond traders in the US and here in Canada, we are dramatically impacted by the direction of bond yields or Treasury yields in the US. And because of the risk, the systemic risk that was introduced by the bank run or potential bank run in the US, and then Credit Suisse and more recently Deutsche Bank in Germany, we are seeing bond yields drop with an expectation that we are imminently on the doorstep of a recession.

Chris: [00:03:41] I want to show you one last chart. This is the Chicago Board of Trade Fed fund rate futures. Basically shows us what the market expects the Federal Reserve in the United States will have to do with their policy rate. And just as a reminder, I mean, I know it’s different Canada, the US, but the direction of the Fed really will influence the direction of the Bank of Canada here. And I really want to show you and highlight how quickly expectations can change. This orange line at the top shows what was expected for the Federal Reserve in the remainder of 2023. Some pretty significant rate increases to a terminal rate of about 5.75%. That’s the orange line. After the Silicon Valley Bank run on the week of March 17th, you can see how quickly the the chart changed. It’s this blue line down here showing essentially no further increases to the Federal Reserve rate and then cuts as soon as June 2023. And this, of course, is is different than what I showed you previously for the Bank of Canada. That was expected to hold rates unchanged throughout the year. So you can see there’s this conflict that’s happening between expectations of central banks and what the market thinks that central banks have to do.

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Chris: [00:05:09] So what’s the punch line here? What direction are Canadian mortgage interest rates likely to head over the next 12 months? Barring any major disruptions, I believe that the Bank of Canada will continue on its current path of holding the overnight rate steady at 4.5%, which will keep the retail prime rate at 6.7% for the majority of this year. Maybe as we get towards the last quarter, maybe the last rate announcement, we might see a drop at that time. As far as fixed rates are concerned, the drop to bond yields has started to reflect in certain insurable mortgages in the market. So we’re now sub 5% for insured mortgages. Uninsurable mortgages carry a little more risk for lenders, so they’ve stayed high. But if bond yields continue at their current level, sub 3%, we should see all rates right across the board below 5% in the next quarter.

Chris: [00:06:14] My name is Chris Molder. I am a Toronto mortgage broker. If you have any questions about how all this information impacts you, your decision making around mortgages, please don’t hesitate to get in touch. Until 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.