On the Radar: US rate hikes and Canadian mortgage rates

Quick takes 

Canadian five-year government yields rose to 3.54% by Thursday, 18 basis points above last Friday’s close, reversing the previous week’s decline and renewing pressure on fixed mortgage funding. 

Canada’s newly released deliberations explain why the Bank raised rates despite core inflation near 2%. The concern was that sustained business costs would spread into consumer prices. 

U.S. futures fully priced a December increase, while Canada’s forecast still favoured a hold. That difference in policy expectations has not prevented Canadian government and mortgage-bond yields from rising. 

Last week’s relief in Canadian borrowing costs had begun to reverse by Thursday. Around midday, the five-year Government of Canada yield stood at 3.54%, up 18 basis points from last Friday’s close, while the ten-year reached 3.78%. The move puts renewed pressure on fixed mortgage pricing even as a December hold remains the likeliest Canadian policy outcome. 

U.S. yields were rising as well, with the five-year Treasury near 4.95% and the ten-year at 5.10% in Thursday trading. The week’s inflation report and Fed speeches had strengthened expectations of further tightening. Both central banks next decide on December 9, but Canadian funding markets are already adjusting before either announcement. 

US inflation keeps further increases in play 

Tuesday’s report showed U.S. consumer prices rose 0.4% in October, slower than September’s 0.6% but above the 0.3% expected. Core prices, excluding food and energy, rose 0.3% for a third consecutive month, against an expected 0.2%. The headline improvement therefore came without the cooling in underlying prices that economists had anticipated. 

The result gave weight to a warning delivered before the release. Fed Governor Christopher Waller had said he supported a quarter-point December increase even if inflation improved. A core reading around 0.3% or higher, he said, would warrant considering a half-point move. The report met that condition, although his remarks did not commit the committee to a larger increase. 

Waller also explained why supporting October’s hold was consistent with wanting higher rates. Expected tightening had already influenced financial markets, allowing the Fed to skip a meeting, provided the increases were eventually delivered. A pause could therefore give the economy time to adjust without signalling that the tightening cycle was finished. 

Dallas Fed President Lorie Logan called for at least two more quarter-point increases, potentially at a faster pace this winter, before reassessing. Her concern extended to services with little direct exposure to oil or tariffs. That matters because relief in energy prices alone might leave enough underlying pressure to justify further tightening. 

There is still a consequential debate about the cost of moving faster. Fed Vice Chair for Supervision Michelle Bowman acknowledged persistent inflation but also highlighted tighter financial conditions and weakness in sectors sensitive to borrowing costs. Those effects could slow demand and inflation, reducing the need for additional increases. The speeches strengthened the case for higher rates without establishing agreement on the pace. 

Why Canada raised rates despite low core inflation 

The Bank of Canada’s deliberations, published Tuesday, look back at its October 28 increase to 2.50%. Members considered holding because core inflation remained near 2%, the economy still had spare capacity and new U.S. tariffs threatened growth. The record shows a decision taken with credible arguments for waiting. 

The case for acting rested on what would happen next. Businesses had largely absorbed higher input costs, but surveys and past experience suggested more would reach customers over the following year. Members also expected a more resilient economy to absorb some spare capacity, leaving less downward pressure on prices to offset those costs. 

This is the Canadian risk behind the latest rate increase. A subdued core reading offers less reassurance when businesses expect to raise prices and the economy may be better able to sustain them. Waiting for broad inflation to appear in the published data could leave monetary policy responding after the pressure had spread. 

The Bank left further increases possible while stressing the need to proceed carefully. Its October discussions also preceded last week’s budget and employment report. The newly released account explains the thinking behind the increase; it does not establish that December’s decision has been settled using the latest information. 

The December odds have moved further in the US 

The probability of a quarter-point U.S. increase rose from 77% at last Friday’s close to 87% by Thursday. That would lift the federal funds target range to 4.00%–4.25% from 3.75%–4.00%. Pricing also allowed for a half-point move, making the size of the increase a live question alongside the path into 2027. 

Canada’s independent forecast changed much less. By Thursday, the probability of a quarter-point increase to 2.75% stood at 35%, compared with 32% last Friday, leaving a hold at 2.50% as the likeliest outcome. The two countries could therefore reach different December decisions despite facing some of the same global inflation pressures. 

Canadian mortgage funding is already responding 

For Canadian variable-rate mortgages linked to prime, the next Bank of Canada decision remains the most direct policy influence. Commercial floating-rate loans can instead reference a Canadian overnight or term benchmark, with the contract determining when the rate resets. A U.S. increase does not itself change Canadian prime, although it can influence expectations for Canadian rates and the cost of new financing. 

Thursday’s rise in Canadian yields shows why five-year fixed terms can face pressure before a policy decision. Investors price the expected path of interest rates over several years, including the influence of U.S. inflation and tightening on Canadian markets. A December hold would leave the overnight rate unchanged, but would not by itself guarantee that fixed funding costs return to last week’s levels. 

The size of the Canadian move still matters independently of the U.S. move. Weaker domestic demand or renewed buying of government bonds could temper further increases. Lenders’ funding spreads can also change, so higher government yields do not establish an equal increase in mortgage quotes. 

Five-year Canada Mortgage Bond yields had also risen, reaching 3.61% on Thursday morning from 3.54% at last Friday’s close. That seven-basis-point increase reversed part of the previous week’s improvement in mortgage funding. The pressure now extends beyond government bonds, although the rate on a particular transaction still depends on the lender’s funding and pricing. 

For new financing, renewals and refinancing, the relevant funding benchmarks have already moved higher. Existing fixed rates remain unchanged through their contracted terms, while a Canadian pause could steady prime-linked borrowing without ensuring stable five-year fixed offers.