Here’s what’s new this week in the real estate and mortgage world going into the start of October.

This week’s news

  • Bond yields are on the rise, forecasting higher interest rates for longer.
  • The Bank of Canada is pointing to growing wages and price increases by businesses as key drivers of inflation.
  • Canada’s economy is slowing, with GDP flat in July.

Bond yields rise, mortgage rates expected to remain higher for longer

Bond yields have been a big topic for discussion this week as the bond market surged at a rapid pace. 5 year bond yields hit 4.46% this week before retracing some of their recent gains, and mortgage lenders are warning this will mean higher rates. Bond yields are typically a leading indicator of fixed mortgage rates, meaning we’ll likely see fixed rates continue to rise in October. We predicted fixed rates would increase in our latest mortgage rate outlook for October. The Bank of Canada will be making their next interest rate announcement on October 25th and it’s seeming more likely that we’re in for another rate hike in the short term.

Recommended reading: How do bond yields influence mortgage rates?

When bond yields go up, it becomes less attractive for banks to invest in mortgages. They have to raise their rates to make up for the extra risk they’re taking on, which means that mortgage rates also go up. Therefore when bond yields rise so do mortgage rates.

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The Bank of Canada is pointing to growing wages and price increases by businesses as key drivers of inflation

In recent messaging from the Bank of Canada, inflation is remaining sticky and wages and price increases are partly to blame. In the first speech from Bank of Canada deputy governor Nicolas Vincent, it was revealed the Bank of Canada now believes recent inflation is “intimately linked” with price increases from businesses. While “corporate greed” is somewhat of a buzz-word in recent times, the Bank of Canada also notes that recent research shows price increases have mirrored the cost increases businesses have faced. Another potential driver of inflation  according to economists is wage growth. Bank of Montreal chief economist Douglas Porter said on Friday that recent data highlighting rising wages “will keep [the Bank of Canada’s] tightening bias firmly in place,”. Another point of view is provided in a September report put out by TD which highlights the role of the central bank increasing the monetary supply as a key driver of inflation. “History has shown that sustained high rates of inflation cannot occur without excessive money growth.” According to the report which looks at recent increases in monetary supply due to the pandemic.

While experts debate over the true “cause” of recent inflation, the important take-away is that the 2% target is proving harder to reach than anticipated and the Bank of Canada is warning that interest rates may remain high for longer than anticipated.

Canada’s GDP was flat in July

The latest data on Canada’s economic output shows that it is slowing, which is to be expected following rapid rate hikes from the Bank of Canada. While GDP rose in 2022 and early 2023, it has started to fall in recent months, falling 0.2% in June and remaining at that level in July. While a stagnating economy isn’t good in the long term, the Bank of Canada also looks to economic output as an indicator that rising interest rates are slowing the economy enough to bring down inflation.

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