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How is Inflation Effecting Mortgage Rates?

Updated: Sep 24, 2021

Inflations Effect on Mortgage Rates

Much of the economic talk so far this year has centered on interest rates. The main questions have been, when will they start to rise and by how much. In an attempt to provide answers, economists and analysts monitor a key factor that guides interest rate policy: inflation.

Inflation has been a non-issue in North America for the better part of 40 years. This was predominantly because after the last significant bout of inflation, in the late '70s through the mid-'80s, central banks in Canada and the United States were given the job of keeping it under control. At that time, the Bank of Canada rate topped 21%, and mortgage rates looked more like credit card interest.

Interest rates are the traditional tool used to control inflation. When it is deemed to be too low, and the economy stops growing, rates get trimmed to stimulate demand and spending. When inflation is too high, rates are raised in an effort to cool off the economy.

Over the past month, inflation has jumped up in both Canada and the United States. In March, Canada's Consumer Price Index hit 2.2% on an annualized basis. Up from 1.1% in February. In the U.S., April's CPI came in at 4.2%. It was enough to rattle American stock markets, which experienced significant drops, at least for a day or two.

But one month does not make a trend and there are mitigating factors. The increases in both countries are compared to the pandemic slump of one year ago. The corresponding employment reports on both sides of the border were weak (strong employment tends to drive inflation because more people have more money to spend). And, both the Bank of Canada and the U.S. Federal Reserve have been expecting inflation spikes as COVID restrictions are loosened. Both have said they will not be responding to these temporary increases.

The central banks are watching for sustained, core inflation in the 2.0% range. The Consumer Price Index covers a broader range of products, including volatile items like food and fuel. These are factored out of central bank calculations. Home prices are not a part of the calculation either. Houses are considered assets, not consumer goods.

Our future will likely continue to see mortgage rates increase to balance out the demand in the market. As both the Canadian and United States economies and employment rates begin to recover through the next year from the downfall of the pandemic, we anticipate the housing market will begin its journey to stabilize and recover over time.

If you are starting the process of buying a home, feel free to contact us with any other questions you may have; we would love to help make your dreams a reality!

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