Tuesday, July 4, 2017

Canadian dollar strengthens due to rate hike expectations

Only a week ago we wrote about how the recent weak inflation statistics may deter the Bank of Canada from a rate hike on July 12, when the next rate announcement is due. But there seems to be a reasonable chance that the Bank may be attributing less weight to the factor of inflation in its macroeconomic politics.

At least, currency traders appear to believe so. On the back of an expected rate hike, the Canadian dollar has recently risen against the American greenback and has strengthened through the psychological barrier of CAD 1.30 per 1 USD for the first time since September 2016.

If currency traders are correct, and expectations of a Bank of Canada rate hike occurs later this month, this may have some implications for the mortgage market in Canada.  According to a Bank of Canada paper, “The Residential Mortgage Market in Canada: a Primer” (December 2013) about 1/3 of mortgages in Canada are variable rate. According to the Huffington Post, about 80% of Canadian mortgage holders currently have a fixed-rate mortgage that locks in a rate for five years. 

Variable rates have been a big benefit to homeowners, especially over the past 30 year of declining interest rates. However, with interest rates at historical lows, we may now be entering a period of rising interest rates. This will affect not only variable rate mortgages, but also fixed rate mortgages that come up for renewal. As well, interest rates on other consumer loans could also be adversely impacted by a rate hike. Perhaps those with mortgages coming up for renewal may benefit from locking in a good rate now for the next several years.
Ukrainian Credit Union Limited

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