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Why Mortgage Rates Are Set to Rise in 2017

Since the surprise election of Donald Trump as President in late 2016, long-term interest rates have dramatically changed course, rising off historical lows as investors re-calibrate expectations for growth, inflation and risk. While Canadian monetary policy is set independent of the US, the medium to long-term interest rates that determine mortgage rates are set globally. That means that the Canadian government must compete for global capital with other nations. That competition is about to get more difficult given the stated budget plans of the Trump administration.

Compounding matters, for the first time in several years US monetary and fiscal policy is at cross purposes. The US Federal Reserve, seeing an economy close to its estimate for full-employment, has signaled its intention to raise rates several times this year.

The Trump administration, on the other hand, continues to publicly push for measures that would likely be inflationary, including a budget replete with ramped up military and infrastructure spending. There remains significant uncertainty as to whether Trump’s plans are merely bluster or indeed if any of his budget can be passed by a notoriously spend-thrift congress. However, markets are choosing to believe in the probability of wider US deficits until proven otherwise.

The net result of this clash of policy will be higher interest rates not just in the US, but around the globe as ramped up US borrowing forces the cost of capital higher. As the Government of Canada has deficit plans of its own, its borrowing costs will rise, pulling consumer rates upward as well. While it may take some time for these trends to play out, we expect that Canadian five-year fixed rate mortgage will rise by about 20 basis points by the end of the year to just under 3 per cent with further, but gradual, increases in 2018.

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