If you’ve been following Canadian mortgage rates lately, you may have heard that the bond market is “pricing in” several Bank of Canada rate hikes.

It’s easy to interpret that as a forecast: The market thinks the Bank of Canada is going to raise rates five times.

I don’t think that’s the best way to look at it.

90-Second Mortgage & Market Update

Are five Bank of Canada rate hikes really coming?

The Bank of Canada held its overnight rate at 2.25% on September 2, but Canadian bond yields have moved higher as investors react to increased inflation risk and the possibility that interest rates may eventually need to rise.

And that’s already putting upward pressure on fixed mortgage rates.

The bond market is giving us a price, not a prediction.

What is the bond market actually telling us?

Markets price risk.

Bond investors are constantly weighing inflation, economic growth, oil prices, government borrowing, central-bank policy and a long list of things that could change tomorrow.

When the risk of higher inflation and higher interest rates increases, investors generally demand a higher return for lending money.

The price changes today even though the eventual outcome is still unknown.

Think about insurance.  If the price of hurricane insurance suddenly jumps, the insurance company isn’t necessarily predicting that your house will be hit by a hurricane. They’re saying the risk has increased, so the price of taking that risk has changed.  That’s roughly how I’d interpret what’s happening in the bond market right now.

Canada isn’t the United States

There’s another important distinction.

The U.S. Federal Reserve raised its target rate by 0.25% this week, taking its target range to 3.75%–4.00%. The Fed said U.S. economic activity remained solid and inflation remained elevated.

Canada has a different economy and different inflation dynamics.

The Bank of Canada’s latest deliberations show exactly why this isn’t a simple decision. Canadian economic growth has improved, but the Bank still sees excess supply in the economy and softness in the labour market. At the same time, persistently high energy prices and trade developments have increased the upside risks to inflation.

So could Canada eventually see several rate hikes?

Absolutely.

But “the market is pricing it” and “it’s going to happen” are two very different statements.

What would change my mind?

I don’t expect five Bank of Canada rate hikes in short order.  But I’m not married to that view.

I’d start changing my mind if Canadian inflation continued to accelerate and became more widespread, economic growth and employment consistently came in stronger than expected, or the Bank of Canada became increasingly concerned about inflation rather than economic weakness.

In fact, the Bank’s September deliberations explicitly acknowledged that the upside risks to inflation have increased. The Bank remains concerned about higher energy prices eventually spreading into other goods and services, while uncertainty around trade could weigh on economic growth.

I think the bond market is sending us a warning signal, not handing us a roadmap.

Could the Bank of Canada raise rates sooner or more aggressively than many expected six months ago? Absolutely.  But there’s still a lot that would have to happen in the Canadian economy before I’d expect five hikes.  For now, I’d pay attention to the signal without treating it like a crystal ball.

What does this mean for mortgage borrowers?

This matters because the bond market is already affecting fixed mortgage rates, even though the Bank of Canada hasn’t raised its policy rate.

That can make the mortgage decision feel more urgent than it actually is.

Rather than trying to predict the next five Bank of Canada meetings, I think borrowers are better served by comparing the options available today and asking a more practical question:

How would I feel if rates moved in either direction?

For some borrowers, paying more for the certainty of a fixed rate will make sense. Others may be comfortable accepting the uncertainty of a variable rate.

There isn’t one answer that works for everyone.

The important thing is understanding the trade-off rather than making the decision based on a headline about what the bond market is supposedly “predicting.”

Need help running the numbers?

If you’re buying a home, renewing a mortgage or trying to decide between fixed and variable, I’m happy to compare the options and show you what your payment could look like under different rate scenarios.

Sometimes seeing the actual numbers is more useful than trying to predict the next five Bank of Canada meetings.

Sean Humphries
Mortgage Broker, Dominion Lending Centres Edge Financial
Helping homebuyers and homeowners across Toronto and the GTA