Saturday, June 14, 2008

Mortgage Rates Jump

Five year mortgage rates jumped about 0.5% this week in response to a jump in yields in the Canadian bond market.

In recent weeks, bond markets around the world seem to have woken up to the fact that maybe inflation is not 2% anymore and maybe it won't be 2% anytime soon. In fact, in most countries, inflation has been creeping up to the mid single digits for the past few years, due to soaring energy and commodity prices, low interest rates and a strong world economy.

Canada has been somewhat exempt from this trend due to a soaring loonie that has caused import prices to drop sharply.

Well, the Bank of Canada decided to surprise the markets this week and not drop interest rates by 25 basis points as expected. Most central banks are either threatening to tighten or are tightening (despite the credit crunch) and the BoC woke up to this new reality this week.

Ultimately, I think that the credit crunch and the coming implosion of the commodities bubble will stop inflation dead in its track, but for now, mortgage rates are increasing. The timing of this will further hurt the Canadian housing market, which had a poor May.

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