As mortgage interest propels Canadian inflation higher, one strategist says the Bank of Canada should elect to hold interest rates at its next meeting.
Statistics Canada’s latest inflation data for July, released Tuesday, showed a 3.3 rise in the consumer price index (CPI) from the previous year. Mortgage interest costs were the largest contributor to July’s headline inflation, Statistics Canada said, with a record annual gain of 30.6 per cent. Excluding mortgage interest costs, the July CPI rose 2.4 per cent, closer to the central bank’s target.
Philip Petursson, the chief investment strategist at IG Wealth Management, said in a Tuesday interview with BNN Bloomberg that he thinks the Bank of Canada should not raise its policy rate at its September meeting given the outsized impact mortgage costs are having on inflation.
“If the Bank of Canada realizes that some of the biggest components to inflation is what they're doing with interest rates, then they should no longer be raising rates,” he said.
“We have the overnight rate at five per cent. If inflation is at 3.3 (per cent) that means the real rate is just about two (per cent). That's pretty punitive as far as the economy is concerned.”
Petursson said that Canada’s central bank may instead elect to “talk inflation down,” where “there’s always the threat that they can raise rates a little bit higher.” He also noted that recent economic data shows some softness in Canada’s economy.
“Look at some of the other economic data. GDP [gross domestic product] for June didn't come in exceptionally strong, in fact it came in weak. If you look at the labour market, it's starting to show signs of weakness,” Petursson said.
“What the Bank of Canada wants, I think is starting to happen. I think they can just sit back for now.”
As mortgage costs drove inflationary pressures in July, quotes for variable-rate mortgages also rose during the month, according to a statement last week from RATESDOTCA.
According to RATESDOTCA, the percentage of variable rate quotes when compared to total mortgage quotes hit 13 per cent in July, up from three per cent a month earlier.
Mortgage expert Victor Tran with RATESDOTCA said the trend shows some consumers may anticipate that interest rates have peaked.
“I think for the most part, customers feel like we're at the peak in terms of fixed rates, and Bank of Canada rate hikes,” Tran said in an interview with BNNBloomberg.ca Tuesday.
“So because of that, it might be worth the gamble for some customers to ride out a slightly higher rate and higher payment for the time being and just really bank on a rate decrease sometime next year.”
Tran said that mortgage interest costs have been contributing to inflation for “quite some time now.”
He said this is due partly to rising interest rates over the last 15 months, resulting in Canadians with variable-rate mortgage products and fixed payments seeing more of their payments go toward interest and not the principal balance.