Canadian Inflation Hits 5.7%, as Fixed Rates Close in on 4%

StatsCanada reported a 5.7% year-over-year increase in consumer prices in February, this was the largest gain since August 1991 (6%). This was no surprise, as the Ukraine War has accelerated inflation on a national level. Up until February, inflation has exceeded the Bank of Canada’s 1% to 3% target for 11 consecutive months. Many central banks have already begun rate hikes.

Shelter Costs Rise At Fastest Pace Since 1983

In February, a 6.6% y/y shelter costs increase was reported, the fastest pace since August 1983. The increases are for both owned accommodation (+6.2%) and rented accommodation (+4.2%). Homeowners’ replacement costs had a 13.2% increase, these are costs related to the price of new homes. Owned accommodation expenses, which include commissions on the sale of real estate, remained elevated year over year, and went up by 14.3%. In contrast, mortgage interest cost moderated the shelter index on a year-over-year basis with a 6% drop.

Interest Rates on the Rise The BoC began the rate hikes in March, bringing the overnight lending rate to 0.5%. Many lenders have announced a fresh round of rate increases, for both fixed and variable rates, which leads 5-Year Fixed Rates approaching 4%. As the interest rates creep upwards, the stress test also increases. The rising stress test will in turn reduce borrowers' affordability. Borrowers are stress-tested either at 5.25% (Bank of Canada's mortgage qualifying rate) or contract rate + 2%, whichever is higher. For those borrowers who secured a rate of 3.25% or higher, they need to pass the stress test at the contract rate + 2%. Most 5-year fixed mortgages offered today range between 3.39% and 3.79%, this means more and more borrowers will be qualified at a stress test higher than 5.25%.

Rate analyst Rob McLister wrote in his Mortgage Logic bulletin, “looking through 22 years of daily bond data, I’m unable to find another Treasuries move in the same timeframe that was this dramatic. That’s driven up average 5-year fixed rates by approximately 48 basis points [over the same period].” The market predicts 5 more rate hikes to come, which will bring the overnight lending rate to 2% by the year-end. The next BoC meeting is on April 13th, 2022, stay tuned for any rate updates!