Federal Reserve chair fuels hopes of lower mortgage rates in Canada
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“The disinflation process has begun,” says Jerome Powell
US Federal Reserve Chairman Jerome Powell. Photo by Elizabeth Frantz/Reuters Files Content of article
Federal Reserve Chair Jerome Powell only had to say one word in his Feb. 1 press conference to spark hopes that mortgage rates in Canada could fall.
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“We can now, I think, for the first time, say that the disinflationary process has started,” Powell said after the Fed’s decision to raise interest rates by 25 basis points to 4.75 percent on Wednesday afternoon.
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The keyword – “disinflation” – was all the markets needed. Stocks soared and bond yields fell as markets around the world anticipated that the Fed’s rate-hiking cycle could end sooner rather than later, and even reverse as the threat of inflation subsides.
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Mortgage strategist Robert McLister noted in a Mortgage Logic newsletter Thursday morning that Canadian five-year yields — a market closely followed when setting mortgage rates — quickly lost 10 basis points following Powell’s comments.
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“This is exactly what Canada’s mortgage market needs if there is any hope of lower fixed rates by spring,” McLister wrote.
While he said it was too early to see Wednesday’s drop in mortgages, he noted that falling bond yields over the past three months have already dragged five-year fixed rates lower.
McLister said that given the current macro environment, it would likely take longer than usual for these falling yields to be reflected in mortgage rates as banks pocket some of the improvement to hedge against downside risks.
“As we head into a recession, lenders will keep their spreads wider than usual to account for perceived risk and other factors,” he said via email. “They may have to deal with higher default rates, lower liquidity in funding markets, and higher interest rate volatility (which increases the cost of hedging).”
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He said short-term fixed rates will fall as the Bank of Canada approaches a rate cut, while floating rates will not fall “significantly” until a cut becomes official.
And he added that markets are undoubtedly expecting rates to fall.
“If you look at the bond market, especially things like overnight index swaps, forward rates and futures, there’s no question that financial markets expect lower interest rates by the end of this year,” he said.
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“As we speak, markets are expecting five-year bond yields — a key driver of five-year fixed rates — to be 42 basis points (basis points) lower 12 months from now.”
The Federal Reserve Chairman’s comments were interpreted as dovish, although he also indicated that further rate hikes were imminent and that rate cuts were unlikely this year.
Last week, the Bank of Canada raised interest rates by 25 basis points to 4.5 percent, but signaled it would hold off future rate hikes to give higher rates a chance to seep through the economy.
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