Many analysts are anticipating that our central bank will leave its key overnight lending rate unchanged at 1.25 per cent on March 7th. The appetite for another rate increase has diminished with decreased prospects for economic growth in Canada for 2018, and the looming uncertainty of trade relations with the U.S. NAFTA negotiations have been sputtering for months and a round of tariffs on steel and aluminum, announced by President Trump last week, are further complicating the situation.
Canadian Mortgage Rate Increases over the Past Year
On July 12th, 2017, the Bank of Canada raised its key over-night lending rate for the first time in seven years, providing a concrete signal that Canada’s economy was finally recovering from the global recession of 2008 and the oil price meltdown of 2014. Our central bank raised its rate again in September and once more in January of this year, on the strength of very strong Canadian economic growth and job creation in 2017:
The labour market has also been remarkably strong with 329,000 new jobs created over the last year—the fastest gain in a decade. Canada’s economic growth in 2017 was the fastest increase among the G7 countries. In all, the Canadian economy expanded by 3.0 per cent in 2017. [This] year, however, growth is expected to slow to a still-healthy 2.1 per cent – Conference Board of Canada
GTA Housing Market Plummeting in 2018
Increased mortgage rates, coupled with new mortgage regulations, such as a new stress test for uninsured mortgage applicants, with more than 20 per cent for their down payment, have taken a big bite out of home prices, which were down 12.4 per cent in February for the GTA and down 4.1 per cent, year-over-year for this January (Toronto Star). The drop in the real estate market is even sharper if you look at sales volume, which was down 35 per cent for February 2018 vs. February 2017… so obviously the new stress test is having a strong impact.
NAFTA Uncertainty a Major Factor to Affect Rate Decisions
With the Canadian economy already looking a lot less shiny going into 2018, a new round of uncertainty is developing over trade relations with the U.S. The ongoing NAFTA negotiations, initiated by President Trump’s “America First Policy” are starting to take a toll on Canada’s economic prospects for this year, giving the Bank of Canada serious pause when considering its next interest rate decision:
The NAFTA talks could now affect the pace and timing of the central bank’s next rate hike. Investors are currently betting the bank will do nothing at its next meeting in March and then move again in April, although the odds of a spring hike have slipped a bit…
“By making NAFTA risks so prominent in this statement, rate hike odds will now ebb and flow with the negotiations,” Bank of Montreal chief economist Doug Porter said in a research note. – The Globe and Mail
Trade Uncertainty Further Complicated by New Tariffs
If uncertainty over NAFTA wasn’t enough to make Bank of Canada Governor, Stephen Poloz, hesitate before considering another rate hike, Donald Trump’s announcement of new tariffs to the tune of 25% on steel and 10% on aluminum should surely do the trick. Canada exports about 90% of its steel from Ontario, and aluminum from Quebec to the U.S. accounting for about 41% of the American market. The announced tariffs, if implemented without granting Canada an exemption, could have a serious impact on the Canadian economy, threatening 40,000 jobs in Hamilton alone.
Although Trump may win points with his voter-base, these commodities are major inputs into many industries in the U.S. which employ far more workers than those employed directly by the American steel and aluminum industries:
U.S. steel and aluminum producers applauded. But companies that rely on steel and aluminum, which employ many more people than the producers, warned of price increases and job losses. Toyota, for example, said the tariffs would “substantially raise costs and therefore prices of cars and trucks sold in America.” MillerCoors said the looming increase in the cost of aluminum cans would “likely to lead to job losses across the beer industry.” – Toronto Star
President Trump has recently tweeted that Mexico and Canada may have an exemption to these tariffs under a version of NAFTA that is more favourable to the U.S. Some may see this as a shrewd negotiating tactic, but at what cost?
Trade War with U.S. Not Good for Either Side
Canada has been a staunch ally of the United States for many decades, through two World Wars, depressions and recessions, though our sporting traditions and our many shared values. Much of the steel and aluminum that the U.S. buys in Canada, for example, feeds the American military complex:
Even the history of Canadian aluminum is also deeply entwined with the U.S. military. Canada built its Bagotville air force base to protect the aluminum smelting in Quebec’s Saguenay region that supplied material to the U.S. military. – CTV News
A trade war with the U.S. benefits neither party, and we remain optimistic that cooler heads will prevail and we can finalize a suitable trade deal with our American neighbours and allies.
Mortgage Applicants May Get Some Breathing Room
The resulting uncertainty over trade relations should give the Bank of Canada a significant pause in considering the timing of its next rate increase. Mortgage holders will likely have a little more breathing room and the housing markets will gain some time to adjust to the recent round of rate increases, coupled with a series of tougher mortgage regulations, over the last calendar year.
During these times of fluctuating mortgage rates, increased regulations, and turbulent market forces, we know that it’s very import for you to get great rates and suitable terms for a mortgage that works for you and your home. At Hatch, we have the experience to guide you through this process and we make it easy to apply for a mortgage, through our convenient online application. Apply today and we’ll get cracking on your mortgage application right away!