What Does High Inflation Mean for Mortgage Rates?

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Canada’s inflation rate came in above expectations last week, rising to its highest level in more than a decade.

If above-target inflation persists, it could have ramifications for homeowners in the form of shifting rate-hike expectations.

Canada’s inflation rate came in burning hot at 3.7% for July, according to data released by Statistics Canada. That’s the third consecutive monthly inflation reading that has come in above the Bank of Canada’s neutral range of 1.75% to 2.75%, which is the range needed to support the economy at full employment/maximum output while keeping inflation under control.

But the Bank of Canada continues to believe that elevated consumer prices will prove temporary and are largely the result of an economy recovering from the pandemic-induced slump.

“…inflation is likely to remain above 3% through the second half of this year and ease back toward 2% in 2022, as short-run imbalances diminish and the considerable overall slack in the economy pulls inflation lower,” the Bank said following last month’s interest rate decision. “The factors pushing up inflation are transitory, but their persistence and magnitude are uncertain and will be monitored closely.”

More recently, Bank of Canada Governor Tiff Macklem reaffirmed the messaging that everything is under control in a July 29 Financial Post column. “The Bank of Canada remains firmly committed to keeping inflation low, stable and predictable,” he wrote. “Even with the gyrations caused by the pandemic, inflation has averaged pretty close to target through the past few years to today. You can be confident that we will keep the cost of living under control as the economy reopens.”

But the central bank can only allow high inflation to persist for so long before a policy response is required.

“The Bank of Canada may be willing to tolerate higher inflation while the economy is still re-opening and recovering from the health shock, but it will respond to more lasting price pressures by reducing monetary accommodation,” wrote TD Bank senior economist James Marple in a recent post. “In the near-term, asset purchases are likely to continue to be pared back, with rate hikes likely to follow late next year.”

At the Bank’s last rate decision meeting in July, it announced that it was reducing its bond-buying program to $2 billion per week from $3 billion.

At the height of the pandemic, the BoC embarked on a quantitative easing program in which it purchased at least $5 billion worth of bonds each week to flood the market with liquidity, in turn keeping 5-year bond yields—and by extension, 5-year fixed mortgage rates—lower than they otherwise would be.

Average mortgage rates remain slightly above their all-time lows reached in December. But the question is, for how much longer?

The Timing of Future Rate Hikes

Those concerned about imminent rate hikes can take solace in the Bank of Canada’s repeated forecast that rates won’t increase until the second half of next year.

“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s July projection, this happens sometime in the second half of 2022,” read the BoC’s statement from its July rate meeting.

The bond market’s read on future rate hikes is that consumers can expect one quarter-point rate hike over the next year, which would take the BoC’s overnight lending rate from its current record low of 0.25% to 0.50%.

And despite the latest high inflation figures, the bond market is actually forecasting one less rate hike over the next two years compared to a couple of months ago—it now expects three 25-bps hikes over the next two years, down from four. Looking three years out, the Bank of Canada is expected to deliver five quarter-point rate hikes in total, bringing the overnight rate to 1.50%.

This would cause prime rate to increase, leading to higher monthly payments for many borrowers with variable-rate mortgages. For those with fixed-payment variable mortgages, the amount of their payment going towards paying down the principal will decline, and the amount going towards interest will increase.

If prime rate was to rise 125 basis points over the next three years, the average mortgage payment could increase by approximately $180 a month, or $2,172 a year, based on today’s average mortgage amount and the lowest variable rates available nationally.

Borrowers with fixed-rate mortgages would not be immediately impacted by rising rates until their mortgage comes up for renewal at the end of their term, or unless they choose to refinance.

“While we are not overly concerned of a payment shock for renewals, the increase in mortgage rates will certainly impact purchasing power for many,” economists from National Bank of Canada wrote in a recent note.

RBI holds repo rate; What it means for home loan, auto loan & personal loan borrowers and what should they do now

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With the Reserve Bank of India (RBI) maintaining status quo on policy rates yet again, borrowers can enjoy the benefit of low interest rates on loans for some more time to come. In its bi-monthly monetary policy review meeting on August 6, 2021, the RBI announced that it has kept key rates unchanged yet again. The repo rate and reverse rate remain at 4% and 3.35%, respectively.This is the eighth consecutive time the RBI has maintained status quo on rates; the last time the repo rate was reduced was in May 2020. The repo rate 4% is the lowest it has been since April 2001.With RBI maintaining status quo, banks most likely will not increase interest rates on loans any time soon.Here is a look at how existing borrowers and those looking to take a new loan (be it home loan car loan , or personal loan ) can take advantage of RBI’s pause. Interest rate is the most critical factor which decides how much you pay for your borrowing, i.e., your loan. With home loans being the longest tenure loans for most borrowers any change in interest rate has considerable impact on the overall interest payment during the remaining tenure of the loan.Most of home loans are given on floating rate basis. RBI had made it mandatory since October 1, 2019, for all floating rate retail loans from banks to be linked to an external benchmark like the repo rate. Most banks have used the repo rate as the benchmark for their home loans. With repo rate being at the lowest level seen in the last two decades, a continuation of the low interest rate regime bodes well for borrowers.With no hike in repo rate, a new borrower who is planning on taking a home loan in the near future can still get loans at prevailing low rates for some more time.Also Read: Repo rate linked home loan: Here are the interest rates of home loans linked to repo rate No change in the repo rate means that existing home loan borrowers will continue paying their EMIs at the same interest rate. However, if your loan is more than 5 years old, then it will make sense for you to check the interest rate regime (i.e., BPLR, Base Rate, MCLR or External Benchmark Rate (EBR)) under which your loan has been sanctioned.If you have not shifted your loan to an external benchmark linked loan, then it is quite likely that you may be paying a much higher interest rate than what is being charged by lenders on the new external benchmark linked home loan. In case you are paying a higher rate you may ask your existing lender to switch your loan to a loan linked to EBR for which you may have to pay a nominal switching fee.However, if your lender is not offering this facility or is charging a higher rate even on an EBR linked home loan, then you may consider switching your loan to a new lender. Being a floating rate loan there is no penalty for switching. This means the only factor that you have to check is the processing fee and charges of the new lender and compare it with the interest advantage that you would get from the switch. If the net benefit appears attractive you can make move. Experts suggest that borrowers should consider balance transfer when the interest rate reduction is 0.5% or more.The maximum tenure of an auto loan ranges between 5 years and 7 years. Depending upon whether you are planning on taking a new loan or are an existing borrower, you can utilise this pause in the repo rate to your advantage.Most of the car loans are still being financed on a fixed interest rate basis, i.e., whatever interest rate that you get at the time of getting the loan, will remain fixed during the entire tenure of the loan. Therefore, when one takes the loan becomes critical.So, if you enter at a low interest rate point (like at present), you can enjoy the advantage of lower EMI payments throughout the tenure of the loan even when the bank increases its overall interest rate. For instance, currently, you can get a car loan from SBI at their lowest rate of 7.75% per annum or from HDFC Bank at their lowest rate of 7.95% a year.So, if you are yet to make up your mind about which car to buy, with the RBI’s pause on rates, you now get some more time to come to your purchase decision as banks mostly likely will not hike rates any time soon.If you took your loan when rates were on the higher side, say 2 years ago, and find the current rate to be much lower, then you can consider switching your loan to a different lender. But before you do that, do check your loan agreement for the foreclosure charge which is typically charged on a fixed rate loan. If the foreclosure charge is low and the advantage of getting a lower rate from another lender is higher, then you will need to calculate the net benefit of switching to a new lender.In the case of personal loans too, banks are unlikely to hike rates soon. So, if you are planning on taking a personal loan, do make sure to keep your credit score with you so that you can check the best rate based on your credit score. The higher your credit score, the better are your chances of getting a loan and that too at a good interest rate.Also Read: A 50 point increase in your credit score can save you this much in loan interest payment Also Read: How to maintain optimum credit score : If you are an existing personal loan borrower then there is not much you can do as a personal loan is given typically in the form of a term loan with fixed rate of interest. However, if you are paying a much higher rate, let us say above 16%, then it would make sense for you to check the rates of other lenders to see if they are offering loans at lower rates and then make the switch. Personal loans are typically for shorter tenures, often 3-5 years, therefore, a switch can result in good savings when you do it in the first half of the repayment period. This is because in the first half of your repayment tenure the major component in your EMI is the interest amount, so any switch has a higher impact in the form of interest amount reduction.

Following Central Bank’s Base Rate Hike Forint Firms to Two-Month High

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In an attempt to curb inflation, the National Bank of Hungary (NBH) once again decided to raise its base rate 30 basis points to 1.50%. In addition, the central bank also announced that it would gradually start withdrawing its government bond purchasing program. The move pushed the forint to a two-month high against the euro.

The National Bank of Hungary (NBH), for the third time in a row, raised its base rate by 30 basis points to now 1.50% at its monthly policy meeting on Tuesday. The NBH also decided to raise its one-week collateralized loan rate and the overnight deposit rate by the same margin to 2.45% and 0.55%, respectively.

The central bank announced back in May that after 10 years it would start a cycle of interest rate hikes, as the means to fight off Hungary’s high inflation rate fueled by the government’s policies aimed at relaunching the country’s pandemic-hit economy. After the first hike in June, central bank governor György Matolcsy outlined that the monetary council would keep raising the base rate until inflation returned to the 2-4 percent target range of the NBH.

Related article National Bank Raises Base Rate for First Time in a Decade NBH policy makers had kept the base rate on hold at 0.60 percent since last summer, but inflation reached 5.1 percent in both April and May.Continue reading

As headline inflation only slowed to an annual 4.6% in July from 5.3% in the previous month, analysts were not surprised that the central bank decided to raise rates again.

This is unlikely to be the last rate hike. The MNB expects inflation to rise again temporarily in the autumn due to base effects, so that by the end of the year it will remain outside the tolerance band of 2-4 percent, only returning to the bracket in early 2022 and stabilizing around 3 percent by mid-2022.

Related article Finance Minister: Hungary’s High Inflation Rate ‘Temporary’ According to a recent datasheet by Eurostat, Hungary’s annual inflation rate is the highest in the whole European Union.Continue reading

In addition to the rate hike NBH also made a more unexpected decision and announced that it would start gradually withdrawing its government bond purchasing program, essentially reducing its support for the government’s spending.

As a first step, the central bank is set to reduce its weekly purchases from 60 to 50 billion, although it may flexibly deviate from this. It will then decide on further steps of withdrawal at the end of each quarter, starting in September.

Forint reaches a two-month peak

The base rate hike and the reduction of the purchase of government bonds had a noticeable impact on the forint.

At first, right after the NBH’s announcement the forint slightly weakened from 349,33 to 349,56. But the central bank’s reduction of its government bond purchasing program likely surprised the market, resulting in an unexpected firm of the currency.

The forint’s exchange rate against the euro quickly jumped to 348 on Tuesday from around 360 at the time of the previous rate increase, hitting a two-month peak.

Featured photo illustration via Pixabay