The Bank of Canada building in Ottawa on June 9.Sean Kilpatrick/The Canadian Press
The Canadian economy posted stronger-than-expected growth in May, Statistics Canada data showed last week, reinforcing expectations that the Bank of Canada will hold the key interest rate at its September meeting.
Any changes to the Bank of Canada’s policy interest rate – which has been at 2.25 per cent for about nine months – would result in changes to variable-rate mortgages.
May’s growth puts the economy on track for annualized growth above 3 per cent in the second quarter – a welcome rebound after two back-to-back quarters of negative annualized growth, or what’s known as a “technical recession.”
However, a new wave of U.S. tariffs – set to take effect Aug. 19 – and broader trade uncertainty could temper the growth in the latter half of the year, complicating the Bank of Canada’s path forward.
Most traders are expecting a quarter-point rate hike by the end of this year, according to Bloomberg data.
With Iran war uncertainty and new tariff threats, should you go with a fixed or variable mortgage?
This week, Canadian government bond yields fell across the curve along with oil as talks to reopen the Strait of Hormuz resumed, easing fears of geopolitical and inflation risk.
In a late July note, Abbey Xu, an economist at Royal Bank of Canada, said the path for headline inflation remains highly sensitive to unpredictable global developments.
On Thursday, the Canadian five-year bond yield – the benchmark for fixed-rate mortgages – settled at 3.23 per cent.
Markets are split on whether the U.S. Federal Reserve will hike rates at its Sept. 16 meeting, which would have a direct effect on Canadian bond yields and financial conditions.
In a July 31 note, Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce Capital Markets, said that if energy prices continue to climb, keeping inflation expectations under wraps would likely mean the Fed would need to meet market expectations for a couple of hikes.
“But war-related pressures on inflation could ease off sharply if things go right in the Persian Gulf, giving the Fed some further breathing room for ‘watchful thinking’.”
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