*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[opendoor]

Originally Posted by Firebot

Where are you getting these numbers? And question foremost, is why are you using them?

https://www.bankofcanada.ca/rates/price-indexes/cpi/

CPIX is 3.3 over 12 months which can be seen on the chart. This category excludes food, energy, and mortgage interest
Stat Can also breaks down in different ways, none of which are close to your number.

https://www150.statcan.gc.ca/n1/dail...g-a002-eng.htm

July 2023 August 2023
All-items Consumer Price Index 3.3 4.0
All-items excluding gasoline 4.1 4.1
All-items excluding food 2.4 3.5
All-items excluding mortgage interest cost 2.4 3.2

So where are you getting the 2.5 from? I have not seen this number quoted anywhere. Are you arbitrarily choosing to change the mortgage interest inflation to 0%, including this in your calculations and using that to measure?

If that is the case, which it seems like, I feel you are being disingenuous in your approach and misleading about the nature of inflation and how you portray it for reasons that you should explain. We know that mortgage interest rates are directly impacted by BoC policy and is inflation caused by rate hikes, but those same policies also impact inflation positively elsewhere.

Selectively removing the negative effects of interest rates on inflation and flat lining the mortgage interest category, while keeping the positive effects, while also omitting volatile categories that make up CPI, is misleading.

Yes, 2.5% is core inflation with mortgage interest inflation excluded. Here's a picture Trevor Tombe posted which shows the last year and half with the 1-month and 3-month averages:





The point of looking at that isn't to create a counterfactual where interest rates weren't increased, because obviously other inflationary pressures would be greater and we'd be in a far worse spot. The point is to separate out supply/demand and market-driven inflation vs. the side effects of policy; without knowing that, you can't really determine the best path forward. If you rely strictly on headline numbers, then you end up operating on a significant lag as increases in interest payments on loans (particularly mortgages) take 1.5-2 years to no longer affect the headline number. If you do that, you end up tightening when you should probably be standing pat or even loosening.


And that works the other way as well, which is more common over the last 30-40 years where we've generally seen declining rates. There's a reason why they began raising rates in 2010 even though headline inflation was only 1.0%. And that's because the headline number was artificially being dragged down by interest rate inflation which had gone deeply negative after the rate cuts of 2007-2009.

The same thing happened in the late '90s. After the mid-'90s rate cuts, inflation was quite low. But they still started raising the policy rate even though inflation was actually sub-1.0% in parts of 1997 and 1998. That's because they recognized that prior interest rate cuts were artificially pulling down the headline number (as was negative energy price inflation), and actual market-driven inflation was creeping up.


Just to use a stupid example, they could cut the policy rate to 0.5% overnight and they'd probably kill the headline number for a period of time as interest rate inflation would go deeply negative. Would that be smart? No, because it would be a side effect of the policy lowering the headline number rather than actual economic conditions, and it would eventually stimulate much more inflation. And the same logic holds in reverse.

[accord1999]

Originally Posted by opendoor

What a weird point. Beyond environmental reasons, shifting to energy sources that aren't commodity based is one of the primary benefits of renewable energy.

A form like hydro which can be stored through reservoirs and has more consistent generation. But solar and wind is even more volatile because of how unpredictable they are and how weak they often are during peak demand periods.

Someone with an electric vehicle in a place with stable electricity prices like BC or Quebec can roughly predict what their fuel costs are going to be even 5 years from now;

I think that's going to be questionable, as BC ratepayers start paying for Site C and if electricity demand grows significantly. As it is Quebec is already running into shortages during the coldest part of winter and building new hydroelectric plants have become "difficult" in Canada.

[opendoor]

Originally Posted by accord1999

I think that's going to be questionable, as BC ratepayers start paying for Site C and if electricity demand grows significantly. As it is Quebec is already running into shortages during the coldest part of winter and building new hydroelectric plants have become "difficult" in Canada.

I didn't say they wouldn't go up, I said they'd be predictable. BC Hydro's rates only change once per year and they normally give guidance for rates several years ahead of time. That level of predictability and cost certainty is valuable.

[Yoho]

https://twitter.com/user/status/1704936485622096022

[Slava]

Originally Posted by Yoho

https://twitter.com/user/status/1704936485622096022

This is based on bond rates, and the central bank (nor the government) has any control over that.

[bizaro86]

Originally Posted by Slava

This is based on bond rates, and the central bank (nor the government) has any control over that.

Control no, influence yes. The BoC is currently engaging in quantitative tightening, which is explicitly designed to raise longer term interest rates.

[blankall]

Originally Posted by Slava

This is based on bond rates, and the central bank (nor the government) has any control over that.

Interest rates don't highly influence bond rates? The BOC doesn't have 100% "control", they have some control. The bond rates are going up, because people think that interest rates will go up in the future.

[opendoor]

And beyond the policy rate, the Bank of Canada is currently selling off a ton of bonds, which will tend to raise the yield. Just in the last month, they've sold off (or not rolled over) almost $30B in Federal government bonds which represents about 3% of the total outstanding value in existence.

[Slava]

Yeah, and that's all going to have some influence. But the reality is that they can't just set a long-term bond rate. The mortgage rates are based on the prevailing bond rates, and those are determined in the market. The central bank (not specific to Canada here), can set the overnight, but they're not able to do that with the longer term rates.

[blankall]

Originally Posted by Slava

Yeah, and that's all going to have some influence. But the reality is that they can't just set a long-term bond rate. The mortgage rates are based on the prevailing bond rates, and those are determined in the market. The central bank (not specific to Canada here), can set the overnight, but they're not able to do that with the longer term rates.

Except that about 80% of what is the mortgage rates are the direct result of the interest rates and where people expect the interest rates to go. If the BoC was, for example, to drop interest rates 3%, bond rates and mortgage rates would also likely drop at least 2%...possibly the whole 3%.

[Slava]

Originally Posted by blankall

Except that about 80% of what is the mortgage rates are the direct result of the interest rates and where people expect the interest rates to go. If the BoC was, for example, to drop interest rates 3%, bond rates and mortgage rates would also likely drop at least 2%...possibly the whole 3%.

Expectations are definitely a factor, and bond rates move to some extent based on the overnight rate, but not entirely. Specifically, when you look at a 5 year bond, things like market expectations, supply/demand, and inflation. Of those, inflation is probably the biggest factor, but it's not contingent on any one thing.

And sure, if the markets in general thought that overnight rates were going to get cut by 3%, yields will decline on new issues. But those bonds that are already issued at 5% are suddenly going to sell for a premium. And realistically, that 3% cut is only coming if there is some economic crisis or calamity.

[Yoho]

Originally Posted by Slava

This is based on bond rates, and the central bank (nor the government) has any control over that.

Ii didn’t say they did, these are just facts..

[Harry Lime]

Wait, so banks are now raising interest rates based on nothing?

[Slava]

Originally Posted by Yoho

Ii didn’t say they did, these are just facts..

Oh, I know you didn't outright say that here. I just know that is baked in for you though. You want to blame Trudeau for this, so I just thought I'd nip that in the bud.

[bizaro86]

Originally Posted by Harry Lime

Wait, so banks are now raising interest rates based on nothing?

No, the banks charge mortgage rates based on the amount 5 year money costs them in the bond market. Since Canada Mortgage Bonds are nearly risk free their cost of funds is set by the government of Canada 5 year bond market.

Based on recent Bank of Canada commentary, inflation data, and US fed commentary, the market's expectations for future interest rates has been going up, so the 5 year rate went up, so mortgage rates went up.

[Yoho]

Originally Posted by Slava

Oh, I know you didn't outright say that here. I just know that is baked in for you though. You want to blame Trudeau for this, so I just thought I'd nip that in the bud.

No I don’t bring politics into these threads.

[Slava]

Originally Posted by Yoho

No I don’t bring politics into these threads.

[opendoor]

Originally Posted by Yoho

Ii didn’t say they did, these are just facts..

I don't know if I'd call near 7% mortgages "facts", unless we're talking 1 or 2 year terms or someone getting raked over the coals by a big bank. You can still get uninsured mortgages for below 6% any day of the week, and much lower for insured/insurable ones.

[Yoho]

Originally Posted by opendoor

I don't know if I'd call near 7% mortgages "facts", unless we're talking 1 or 2 year terms or someone getting raked over the coals by a big bank. You can still get uninsured mortgages for below 6% any day of the week, and much lower for insured/insurable ones.

He clarified it in the comments on duration.

https://twitter.com/user/status/1704938137624174799


Interesting if true sounds about right.

https://twitter.com/user/status/1704983975859777622

[opendoor]

Originally Posted by Yoho

He clarified it in the comments on duration.

https://twitter.com/user/status/1704938137624174799

There's a pretty big difference between 2 year and 3 year rates (about 0.6 percentage points from what I've seen). And the data I've seen shows about 70% of fixed mortgages (and about about 65% of all mortgages) recently have been for 3+ years. All those terms can still be had for under 6%.

That said, I am pretty surprised how many people seem to be going short-term fixed given how bad the rates are. At the start of 2023, about 45% of fixed rates were 1-2Y, but those rates have never really been competitive. At the start of this year you could have gotten a 4.5% 5-year, but people were opting for 5.5-5.7% 1-year loans on the hopes that they could get a lower rate in early 2024, which isn't looking particularly likely.