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While the pace of fixed-rate increases has slowed, lenders continued to bump mortgage rates higher this week, including three of the big banks.

All of the big banks are now advertising posted rates above 6% for 2- to 4-year terms, with nearly all advertising 1-year rates above 7%. Select 5-year terms are still available for under 6% for now.

As we reported last week, mortgage providers have been hiking fixed mortgage rates in response to rising Government of Canada bond yields and in order to maintain profitable spreads on their costs of funds.

Yields continued to fluctuate sharply over the course of the week, responding to slower-than-expected Canadian headline inflation, as well as an upward revision in U.S. first-quarter GDP and a cooling of U.S. inflation in May.

Rate-watcher Ryan Sims, a mortgage broker with TMG The Mortgage Group, said it’s too early to tell if rates will continue to rise from here.

“Lenders are really starting to take more spread right now, so it seems to be less about the actual yield and more about the spread,” he told CMT. “I think we will have to see sustained pressure in yields to the 3.85% to 4.00% range before you see another mass raising of fixed rates.”

Rising costs a top concern, especially for borrowers with upcoming mortgage renewals

Today’s high cost of living is the top concern among Canadian consumers, but even more so for mortgage holders facing a renewal in the coming years.

Nearly half (48%) of respondents to the Bank of Canada’s second-quarter Canadian Survey of Consumer Expectations cited cost of living as their top financial concern.

The survey found the impact of rising interest rates has been most acute for borrowers with a variable-rate mortgage. “Interest rates on our variable-rate mortgage went from 2.6% to 6%,” one respondent said. “We are not able to go out to restaurants anymore or go on vacations because we need to be able to pay for our mortgage.”

But the longer that rates remain elevated, the more mortgage borrowers will be impacted as their mortgages come up for renewal.

The survey revealed that most mortgage holders expect to be able to manage their payment increases, although they say it will constrain their discretionary spending. This is especially true for those facing renewals in the next two years, who are more likely to expect their payments to “increase a lot.”

“Homeowners expecting their mortgage payments to increase significantly are more likely to hold back spending, either ahead of or following renewal,” the BoC survey reads. “They may also choose to reduce savings or extend their mortgage amortization period.”

Looking at mortgage product preferences, mortgage holders who are closer to their renewal said they are more likely to choose a short-term fixed-rate mortgage, while those further from renewal are more likely to choose a longer-term fixed-rate plan.

GDP data expected to keep BoC on track for July rate hike

Canada’s economic activity was flat in April compared to March, and less than the 0.2% growth rate expected.

However, preliminary estimates point to a 0.4% monthly rebound in May, according to data released by Statistics Canada on Friday.

March’s flat reading was also revised up slightly to show 0.1% month-over-month growth from February. On an annual basis, real GDP growth was up 1.7%.

StatCan reported 0.1% monthly growth among goods-producing industries, while services-producing industries remained flat.

The real estate sector, meanwhile, including activity at the offices of real estate agents and brokers, was up 8.6% in April thanks to a rise in home sales in the preceding months, StatCan said.

Economists believe the Bank of Canada is still expected to lift rates another quarter-point at its July 12 rate meeting despite the slower-than-expected growth in April.

“The Bank likely won’t be happy about the sustained output gains in the economy outside of the public sector so far in Q2, particularly in real estate,” wrote Randall Bartlett,
senior director of Canadian Economics at Desjardins. “Combined with the ongoing reluctance of core CPI inflation to trend toward the Bank’s 2% target, we continue to expect the Bank will hike by another 25 basis points at its July meeting.”

Business sentiment weakens; most expect inflation above 3% for the next two years

Canadian business sentiment has weakened with many expecting weak sales growth in the coming months, while a majority continue to believe inflation will remain elevated over the next several years.

The results come from the Bank of Canada’s second-quarter Business Outlook Survey, released today.

The Business Outlook Survey (BOS) indicator slipped further in Q2 with more businesses expecting slower growth, weaker hiring and investment intentions, and a broader tightening in credit conditions. The indicator is now at a reading of -2.15, down from -1.07 in Q1 and 4.83 a year ago.

“Although firms still see cost pressures and labour shortages as top concerns, these have been mentioned less and less over the past year,” the survey notes. “In contrast, slowing demand has become a more important and widespread concern in recent quarters.”

And while inflation expectations are easing, they remain elevated with 64% of businesses believing inflation will remain above 3% over the next two years. That has continued to drop from a high of 84% in Q4 2022.

Nearly a third of businesses expect inflation of between 2% and 3% over the next two years, up from 17% in the previous quarter.

“Today’s BOS survey flagged more softening in a slew of business sentiment indicators in Q2, including deterioration in the future sales outlook, further easing in capacity pressures, and slightly lower inflation expectations,” RBC economist Claire Fan wrote in a research note. “Those however, probably aren’t enough to prevent another interest rate hike from the BoC in July.”

The Business Outlook Survey (BOS) indicator

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