Canadian fixed mortgage rates are currently at their lowest level in the past two years and the consensus among leading economists is that they will likely stay in a range, at or below three per cent, for the remainder of 2019 and well into 2020. Low unemployment, a rebounding housing economy, a weaker Canadian dollar and the removal of tariffs on steel and aluminum, all bode well for Canada to avoid an economic downturn and have led to some moderate projections of economic growth in the coming months in the range 1.5 per cent. However, oil prices have fallen 20-30 per cent since this years’ high in April, and just last week President Trump telegraphed a new round of tariffs aimed squarely at China. A continued or escalated trade war between the world’s two largest economies will surely create some economic headwinds in Canada, due to our large exposure to the U.S. as our number one trading partner, and may even cause the Bank of Canada to take corrective action by way of an unexpected rate cut.
U.S. Fed Cuts Rate for First Time in over a Decade
In anticipation of greater economic risks to the American economy, largely due to trade tensions with China, on July 31st the U.S. Fed announced its first rate cut in the last decade. Jerome Powell, Chairman of the U.S. Fed, explained the cut as a preventative action to avoid future risks, rather than a reaction to current economic performance. Although Canada’s economy is closely linked to the U.S., there is a view among many economists that the Bank of Canada won’t likely follow with a similar cut, at least for now:
Fed chairman Jerome Powell said in his explanation that the overall goal of the move was to sustain the U.S. economic expansion. He also underlined concerns about slowing global growth, trade tensions and stubbornly low inflation… The Fed’s first cut since 2008 was a significant policy step for Canada’s biggest trading partner, though one experts say is unlikely to pull Canada’s central bank out of its holding pattern in the coming months. – CTV News
Bank of Canada Not Likely to Make an Immediate Cut
Partly because the Bank of Canada has not been as aggressive as the U.S. Fed in its rate increases in recent years, and partly because Canada is at a different stage in the economic cycle as the U.S., according to the Bank of Canada’s senior deputy governor, Carolyn Wilkins, our central bank appears to have no immediate appetite to follow its American counterpart with a rate decrease:
“The fact that Canada is picking up while the U.S. economy is slowing sounds like a divergence. In fact, it’s a process of convergence,” said Wilkins, noting Canada’s interest rate was already lower than the Fed’s… “The United States is slowing to a more sustainable pace, while Canada is moving back up to its trend growth… By the second half of this year, growth should be similar in both economies as they converge on their respective potential level of activity.” – CTV News
The Wild Card: Trade War with China
The biggest wild card for the Canadian economy is the potential of an all-out trade war between China and the United States. This dangerous prospect threatens not only the American and our closely linked Canadian economies, but indeed many of the interdependent economies in the global supply chain. Just last week, Trump broke the fragile truce between the world’s two economic superpowers, by announcing plans to levy additional tariffs on Chinese imports this September. China responded by stating it will not ignore these threats and is considering retaliatory measures:
China on Friday [August 2nd] said it would not be blackmailed and warned of retaliation after U.S. President Donald Trump vowed to slap a 10 per cent tariff on $300 billion US of Chinese imports from next month, sharply escalating a trade row between the world’s biggest economies… Trump on Thursday [August 3rd] stunned financial markets by saying he plans to levy the additional duties from Sept. 1, marking an abrupt end to a truce in a year-long trade war that has slowed global growth and disrupted supply chains. – CBC News
The U.S. Fed’s recent rate cut may very well be in anticipation of a trade war with China. As the U.S. election cycle starts to rev up, Trump may become more entrenched on this file to appeal to his voter base and so the prospect of additional interest rate cuts by the U.S. could well be on the table. If a second rate cut by the U.S. Fed happens in the short term, the Bank of Canada will face additional pressure to follow suit:
CIBC chief economist Avery Shenfeld said even though the global outlook is weakening there’s less pressure on the Bank of Canada to follow the Fed because it didn’t hike its rate as much over the last decade… He noted, however, that a second cut by the Fed in the coming months could apply unwelcome upward pressure on the Canadian dollar. Canada, he said, would prefer a lower loonie to help its exports in a slowing global environment… “So, eventually the Bank of Canada could be dragged into a rate cut, but the timing of that is probably not until 2020,” Shenfeld said. – CTV News
This economic uncertainty could take a damaging toll on Canadian exports to the U.S. and let’s not forget that Canada’s trade relationship with China is already on very rocky ground, stemming from tensions over the arrest and extradition hearings for Huawei’s CFO. This may leave many Canadians worried about their investments and employment prospects. Canada’s agriculture industry is already feeling the pinch:
“Since the end of December we have not sold a single vessel – a shipload of soybeans – to China,” Ron Davidson, executive director at Soy Canada, said. – The Globe & Mail
Canadian Mortgage Rates Expected to Stay Low Through 2019 into 2020
In terms of mortgage rates, most economic signals are against any kind of significant rate increase in the near term. However, If the Bank of Canada is forced to make a rate cut in response to the increasing uncertainty and tensions with China, variable mortgage rates will drop and the qualifying rate for the mortgage stress test might even drop a bit, making it easier, especially for first-time home buyers to enter the housing market:
Canadians can expect fixed rates to maintain their current levels, or possibly decrease, in the foreseeable future. Those with variable rates will only be affected if and when the Bank of Canada makes the decision to cut the key overnight rate. – BNN Bloomberg
The bond market also had an immediate response to President Trump’s announcement of new tariffs on Chinese goods, placing downward pressure on fixed mortgage rates in Canada, as the U.S. bond market plays a predominant role influencing funding for lenders offering fixed rate mortgages in Canada:
The yield on the 10-year U.S. Treasury note recorded its largest one-day decline in more than a year, falling to its lowest level since the 2016 presidential election after President Trump announced new tariffs on Chinese imports. – Wall Street Journal
With new developments on the trade war with China happening rapidly, it’s hard to imagine that there won’t be some significant level of economic disruption. At the very least, the swiftly growing trade tensions between China and America (like it or not, including Canada) are destabilizing the global economic environment and increasing uncertainly across many markets and industries.
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In times of economic uncertainty, nobody wants to have to pay more than they have to for any kind of loan, especially a mortgage. That’s why at Hatch we strive to continually bring our clients some of the best mortgage rates anywhere in Canada through our large network of lenders. Our Senior Broker, Dan Martel, is a seasoned veteran with over 30 years’ experience in the mortgage industry. Dan provides a personalized approach so that you not only get a mortgage with a great rate, but also with terms that work best for your situation and your property. Simply fill out our convenient online mortgage form and Hatch will get cracking on your application!