Interest rate hikes fade into the future as economic recovery appears to go flat
It seems a terrible thing to cheer about, but a new feeling of gloom may be good for Canadians weighed down by mortgage debt.
A worse-than-expected U.S. jobs report and increasing fears for the state of developing world economies mean that U.S. central banker Janet Yellen may have to once again delay a hike in interest rates.
Fed chair Yellen has repeatedly warned that U.S. interest rates are on the way up. Last month, she delayed that rate rise once again while suggesting the increase could very likely come by the end of this year.
Now a growing number of analysts say a hike in U.S. interest rates will be delayed to 2016 or beyond.
Why U.S. rates matter in Canada
Before going on, I should insert a quick reminder of why U.S. interest rates matter to so many Canadian mortgage holders.
While short-term rates are set by the Bank of Canada, mortgage rates depend on the cost of borrowing money on international bond markets. Before lending long-term cash, Canadian banks like to make sure they can spread the load if rates begin to rise. That means they look to the bond market to set the price of the long-term cash they lend.
When the U.S. Fed rates begin to rise, international bond rates begin to rise as well, and banks must pass along those increased interest interest costs to their customers.
As recently as June, Yellen foresaw not just an autumn rate rise, but her advisers on the Federal Open Markets Committee also suggested that rates would continue to rise at about a whole percentage point each year. In other words, long-term rates that were four per cent this year would be five per cent next and six per cent the year after.
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