All but one of Canada’s six biggest commercial lenders now say the central bank will raise interest rates this month after the jobless rate dropped to its lowest in modern records.

Toronto-Dominion Bank, Bank of Nova Scotia, Royal Bank of Canada and the Canadian Imperial Bank of Commerce changed their forecasts after a Statistics Canada report showed the unemployment rate unexpectedly fell to 5.7% in December, from 5.9% the previous month, on the strength of 78,600 new jobs.

“Given the tremendous progress made in narrowing labor market slack – an area highlighted by the Bank of Canada in recent communication – we think that today’s report is enough to push” Governor Stephen Poloz to raise rates on 17 January, CIBC economist Nick Exarhos said in a note to investors.

RBC economist Josh Nye said in a note to investors the jobs figures “further increase the odds that the BoC raises rates at their coming meeting” and confirmed in an interview the bank is also moving up its forecast.

Bank of Montreal remains on the fence. Economist Robert Kavcic said in a research note the Bank of Canada may move this month if a survey of executives the central bank publishes on Monday also shows strength. “We’re going to wait to see what the Business Outlook Survey says,” he added in an interview.

The consensus of economists polled by Bloomberg last month was for an increase in April, with National Bank Financial already calling for a January move in that survey. Poloz increased the central bank’s benchmark overnight rate to 1% at consecutive decisions in July and September, but ended the year stressing that policy makers would be “cautious” with future moves.

This morning’s release of the Canadian Real Estate Association (CREA) data for July confirmed that key housing markets in Canada continued to slow, led by the Greater Golden Horseshoe (GGH) region surrounding Toronto. This region’s marked slowdown began in late April with the announcement of a 15% foreign tax credit and a sixteen-point program to enhance housing affordability in the Ontario provincial budget.
Notably impacting psychology, was the Bank of Canada rate hike in July, the first such hike in seven years. Positive surprises in the Canadian economy this year caused the Bank to preempt inflation pressures sooner than many had expected. The Canadian dollar and mortgage rates rose in response to the Bank’s action. The posted mortgage rate has now increased 20 basis points to 4.84%, which is of particular importance because this is now the assumed borrowing rate at which mortgage applicants must qualify for insured loans. There is a proposal to extend this qualification criterion to uninsured borrowers as well–that is, those that put at least 20% down on their home purchase. Before October 2016, the eligibility rate was the contract rate, which is meaningfully lower than 4.84%.

CREA’s national data showed that the number of homes sold on the MLS Systems fell 2.1% in July, the fourth consecutive monthly decline. While this decrease in sales was about one-third the magnitude of those in May and June, it leaves sales activity 15.3% lower than the record set in March. Sales were down from the previous month in close to two-thirds of all local markets, led by the Greater Toronto Area (GTA), Calgary, Halifax-Dartmouth and Ottawa.

On a year-over-year basis, sales were down 11.9% last month. Sales were down from year-ago levels in about 60% of all local markets. However, excluding the GGH region, net national sales activity was little changed from one year ago.

“July’s interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer,” said CREA President Andrew Peck. “Even so, sales activity continued to soften in the Greater Golden Horseshoe region. Meanwhile, sales and prices in Montreal continue to strengthen.” Anecdotal reports suggest that foreign buyers were more active in Montreal where, in contrast to Toronto and Vancouver, there is no international buyers tax.

New Listings Slipped in July

The number of new listings edged down by 1.8% last month, led by the GTA. Many other markets in the Greater Golden Horseshoe region also saw new supply pull back after having surged immediately after the Ontario government housing policy changes in April 2017. New listings were also down in Calgary, Edmonton, Montreal and northern British Columbia, with the latter-most region hit by wildfires.

With sales down by about the same amount as new listings in July, the national sales-to-new listings ratio stabilized at a well-balanced 53.5%. By contrast, the ratio was in the high-60% range in the first quarter of 2017. The ratio in the range of 40%-to-60% is considered consistent with balanced housing market conditions. Above 60% is considered a sellers’ market and below 40%, a buyers’ market.

Based on a comparison of the sales-to-new listings ratio with its long-term average, more than 60% of all local markets are in balanced market territory. In the Greater Golden Horseshoe region, housing markets that recently favoured sellers for an extended period are now balanced, with some beginning to tilt toward buyers’ market territory.

Number of Months of Inventory

The number of months of inventory is another important measure of the equilibrium between housing supply and demand. It represents how long it would take to completely liquidate current inventories at the current rate of sales activity. There were 5.2 months of inventory on a national basis at the end of July 2017, the highest level since January 2016. The 5.2 figure was up from 5.0 months in June and up by more than a full month from where it stood in March.

The number of months of inventory in the Greater Golden Horseshoe region is up sharply from where it was before the April provincial announcements. For the region as a whole, there were 2.6 months of inventory in July 2017. While this remains below the long-term average of just over three months, it is more than triple the all-time low of 0.8 months reached in February and March.

Prices Continue to Decline

Home prices continued to fall in July, extending the decline that began in late April. The Aggregate Composite MLS House Price Index rose by 12.9% year-over-year in July, a further deceleration from the pace earlier this year. The decline in price growth from June to July was the result of softening prices in the GGH.

The MLS Home Price Index (MLS HPI) provides the best way of gauging price trends because average price trends are prone to be strongly distorted by changes in the mix of sales activity from one month to the next.

Price gains diminished in all benchmark categories, led by single family homes. Apartment units posted the largest y-o-y gains in July (+20%), followed by townhouse/row units (+15.9%), two-storey single family homes (+10.7%), and one-storey single family homes (+9.7%).

After having dipped in the second half of last year, benchmark home prices in the Lower Mainland of British Columbia have recovered and are now at new highs (Greater Vancouver: +8.7% y-o-y; Fraser Valley: +14.8% y-o-y).

Meanwhile, y-o-y benchmark home price increases were running a little below 20% in Victoria and just above 20% elsewhere on Vancouver Island.

Benchmark price gains slowed again on a y-o-y basis in Greater Toronto, Oakville-Milton and Guelph but remain well above year-ago levels (Greater Toronto: +18.1% y-o-y; Oakville-Milton: +12.7% y-o-y; Guelph: +23% y-o-y).

Calgary benchmark prices further edged into positive territory on a y-o-y basis in July (+1.1%). While Regina home prices popped back above year-ago levels (+3.6% y-o-y), Saskatoon home prices remained down (-2.2% y-o-y).

Benchmark home price growth accelerated in Ottawa (+5.8% overall, led by a 6.8% increase in two-storey single family home prices) and Greater Montreal (+4.9% overall, driven by a 7% increase in prices for townhouse/row units). Prices were up 5.4% overall in Greater Moncton, led by one-storey single family home prices which set a new record (+8.9%).

Fears of rising mortgage rates are about to translate into reality, as the Bank of Canada (BoC) appears set to raise its overnight lending rate by at least 25 basis points during its July 12 meeting, a likelihood that has sent long-term bond yields through the roof (mortgage rates are partly based on the government’s five-year bonds).

“Nothing is inevitable, but I believe we are on the cusp [of rate rises] given the rise back up in Canadian bond yields over the last few weeks,” said Douglas Porter, chief economist of the Bank of Montreal (BMO). The five-year Canada bond had fallen to just over 0.9% in mid-May, but by Friday was closing in at 1.4%.

Some financial institutions have already begun to quietly raise their discretionary rates over the past week. This is a potentially devastating situation for Canadian consumers grappling with near-record levels of debt.

Economists have been forecasting a rise in rates for a number of years, and it’s been enough of a concern that Ottawa modified the rules for government-backed mortgages to require consumers to qualify based on making potential payments tied to the higher five-year posted rate, which now sits at 4.64%. This is a cushion designed to deal with household debt, which was 166.9% of disposable income in the first quarter of 2017, after hitting a record in 2016.

While long-term rates are expected to rise as early as next week, consumers with variable-rate mortgages tied to the prime lending rate will also immediately feel the sting of any increase from the BoC. Approximately 25% of Canadians still have a floating rate product, according to Will Dunning, chief economist at Mortgage Professionals Canada.

“I do think rates may have already risen as much as they can, given the economic conditions we already have,” Dunning said. “I just don’t think a large increase in rates can be sustained. I also think it takes at least three-quarters of a point [0.7%] before it starts impacting consumers.”

Federal Reserve officials forged ahead with an interest-rate increase and additional plans to tighten monetary policy despite growing concerns over weak inflation.

Policy makers agreed to raise their benchmark lending rate for the third time in six months, maintained their outlook for one more hike in 2017 and set out some details for how they intend to shrink their $4.5 trillion balance sheet this year.

“Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington. “The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.”

Policy makers also issued forecasts showing another three quarter-point rate increases in 2018, similar to the previous projections in March.

The Fed’s actions and words struck a careful balance between showing resolve to continue tightening in response to falling unemployment while acknowledging the persistence of unexpectedly low inflation this year.

“Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee’s 2 percent objective over the medium term,” the statement said.

The committee had previously described inflation as close to their goal.

Economic Data

Data released earlier Wednesday showed that, on a year-over-year basis, the core version of consumer price inflation, which strips out food and energy components, slowed for the fourth straight month, to 1.7 percent in May. Following that news, the probability that the June hike would be followed by another increase this year dropped to about 28 percent from 48 percent, according to pricing in fed funds futures contracts.

In a separate statement on Wednesday, the Fed spelled out the details of its plan to allow the balance sheet to shrink by gradually rolling off a fixed amount of assets on a monthly basis. The initial cap will be set at $10 billion a month: $6 billion from Treasuries and $4 billion from mortgage-backed securities.

The caps will increase every three months by $6 billion for Treasuries and $4 billion for MBS until they reach $30 billion and $20 billion, respectively.

Officials didn’t reveal the exact timing of when the process will begin this year, as well as specifically how large the portfolio might be when finished.

The FOMC retained language that it expects to keep raising interest rates at a “gradual” pace if economic data play out in line with forecasts.

Yellen Remarks

Yellen is scheduled to hold a press conference at 2:30 p.m. where reporters are likely to ask, among other topics, about her outlook for rates and the balance sheet.

Wednesday’s decision brings the Fed’s target for the federal funds rate, which covers overnight loans between banks, to a range of 1 percent to 1.25 percent.

The vote was 8-1, with Minneapolis Fed President Neel Kashkari dissenting from a rate increase for the second time this year, preferring no change.

Quarterly projections for 2018 and 2019 showed Fed policy makers largely maintained their expected path for borrowing costs. The median forecast still has the central bank making three quarter-point increases in 2018; the end-2019 rate is seen at 2.9 percent, a slight change from 3 percent in the March projections.

The new forecasts may in part reflect changes in the FOMC since the last meeting, including the departures of Governor Daniel Tarullo and Richmond Fed President Jeffrey Lacker, and the arrival of new Atlanta Fed President Raphael Bostic.

In any event, interest-rate projections for 2018 and 2019 are becoming less reliable guides to future policy amid the likelihood that the Fed’s Board of Governors will see a major makeover in the next year.

The Fed has in recent weeks wrestled with contradictory signals from unemployment and inflation. Joblessness in the U.S. dropped to a 16-year low at 4.3 percent in May. Despite that, the Fed’s favorite measure of price pressures, excluding food and energy components, rose just 1.5 percent in the 12 months through April, down from 1.8 percent in February. The Fed’s target for inflation is 2 percent.

Inflation Projections

The recent economic developments prompted FOMC members to drop their median projection for inflation to 1.6 percent in 2017, from 1.9 percent forecast in March. The median forecasts for 2018 and 2019, however, were unchanged at 2 percent.

They also reduced slightly their estimate for the lowest sustainable level of long-run unemployment to 4.6 percent from 4.7 percent. That change, and the reduction in the 2017 inflation forecast, could reduce the urgency policy makers feel to hike rates again in coming months, especially if inflation remains soft.

“Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined,” the FOMC statement said.

Economic-growth projections were little changed, with the median forecast for 2017 moving to 2.2 percent from 2.1 percent.

The FOMC next meets in six weeks, on July 25-26. A Bloomberg survey of 43 economists conducted June 5-8 showed a median expectation for rate hikes in June and September, followed by the start of balance-sheet unwinding in the fourth quarter.

The Washington political world is in disarray. Britain’s election tumult has scrambled the outlook for Europe. And economies in the United States and abroad are plodding along at a pace that hardly suggests robust health.

Yet when the Federal Reserve meets Wednesday, it’s all but sure to raise its benchmark interest rate for the third time in six months _ a pace the Fed would normally adopt when it’s trying to slow an economy at risk of overheating.

So why the rush to keep raising rates?

Even with the economy growing sluggishly, the barometers the Fed studies most closely have given it the confidence to keep gradually lifting still-low borrowing rates toward their historic norms.

Though the Fed monitors the overall economy, its mandates are to maximize employment and stabilize prices. And hiring in the United States remains solid if slowing, with employment at a 16-year-low of 4.3 per cent _ even below the level the Fed associates with full employment.

Inflation has been more problematic, having long stayed below the central bank’s 2 per cent target rate. But Fed officials have said they think inflation, which has recently slowed further, will soon pick up along with the economy.

That said, no one expects the Fed to turn aggressive. If nothing else, the political fights and uncertainty in Washington _ over investigations into Russia’s ties to President Donald Trump’s campaign, health care legislation, tax cut proposals and about whether Congress will raise the nation’s borrowing limit and pass a new budget _ could lead the Fed to raise rates more slowly than it otherwise would.

“We are looking at a very messy summer in terms of policy in general, and that may cause the Fed to retreat to the sidelines for a while,” said Diane Swonk, chief economist at DS Economics of Chicago.

Uncertainty also surrounds the Fed’s policy committee’s membership. Trump is expected soon to fill three vacancies on the Fed’s influential board, and those new members, depending on who they are, could alter its rate-setting policy.

Given all that isn’t known, some analysts say an additional rate hike that they had expected in September, to follow the increase they foresee this week, might not happen until December.

“I don’t think there will be any retreat from the Fed’s desire to stay on course for gradual increases in interest rates, but the frequency of the increases may be spaced out over a longer period,” said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.

The CME Group’s tracking gauge shows that market traders see a 96 per cent probability that the Fed this week will raise its target for the federal funds rate _ the interest that banks charge each other _ from a range of 0.75 per cent to 1 per cent to a range of 1 per cent to 1.25 per cent.

The Fed had kept its benchmark rate at a record low near zero starting in late 2008 to try to boost consumer and business borrowing and lift the country out of the worst downturn since the 1930s. It raised the rate modestly in December 2015, then waited a year do so again. It acted again in March and has projected a total of three rate increases this year.

Fed officials have said they think the economy, now entering its ninth year of expansion, no longer needs the ultra-low borrowing rates they has been supplying. Besides stepping up its pace of rate increases, the Fed has also signalled that it’s pondering a plan to begin reducing its enormous portfolio of bonds. At the depths of the recession, the Fed began buying Treasury and mortgage bonds to try to depress long-term loan rates. That effort resulted in a five-fold increase in its portfolio to $4.5 trillion.

In a statement the Fed will release Wednesday _ and in a news conference by Chair Janet Yellen to follow _ officials may begin to disclose details of how they will begin to pare the bond portfolio, likely by slowing the reinvestment of maturing bonds.

The Fed has been buying bonds to replace those that are maturing and to keep its balance sheet from shrinking. Some analysts have suggested that the Fed will eventually allow a small amount of bonds to mature without being replaced _ an amount that would gradually rise as markets adjusted to the process.

Some news reports have mentioned leading candidates to fill the three vacancies on the Fed’s seven-member board. They include Randal Quarles, a top Treasury official in two past Republican administrations, for the vice chairman’s job of overseeing bank regulation. Marvin Goodfriend, an economist at Carnegie Mellon University, has been mentioned for another board spot, and Robert Jones, chief executive of Old National Bancorp in Indiana, reportedly is a candidate for a board seat designated for a community banker.

The betting is that the administration will choose officials who will tilt the Fed toward a more “hawkish” stance. Hawks tend to worry that rates kept too low for too long could escalate inflation or fuel asset bubbles. By contrast, “doves” favour the direction taken under Yellen, favouring relatively low rates to maximize employment.

“I think we are going to end up with a Fed that leans more in a hawkish direction,”’ said economist David Jones, the author of several books on the central bank. “The big question is what will they do about Yellen.”

Yellen, the first woman to lead the Fed, is serving a term that will end in February. So far, Trump has sent conflicting signals about whether he plans to nominate her for a second term.

The Bank of Canada is sticking with its trendsetting interest rate of 0.5 per cent, saying uncertainties continue to overshadow the economy’s stronger-than-expected start to the year.

In explaining its decision Wednesday to hold the rate, the central bank once again highlighted weak wage growth and the softening rate for underlying inflation as examples the economy still has room for improvement.

The bank’s scheduled rate announcement comes after it raised its 2017 growth projection last month following a surprisingly healthy start to the year in areas such as employment, consumer spending and the housing markets. In Wednesday’s statement, the bank added better business investment numbers to the list.

“Recent economic data have been encouraging,” the bank said.

“Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions.”

The bank’s statement, however, also predicted that the “very strong growth” over the first three months of the year will be followed by some moderation in the second quarter, even though at the same time it expects the U.S. economy to rebound.

Analysts had widely predicted governor Stephen Poloz to keep the rate locked at its very low level of 0.5 per cent, as significant unknowns underlined by the bank in the past continue to swirl around the U.S. agenda on trade and taxation.

“The uncertainties outlined in the April (monetary policy report) continue to cloud the global and Canadian outlooks,” said the bank, without making any specific mentions this time about the potential policy path of Canada’s largest trading partner.

With no monetary policy report released Wednesday, observers will scrutinize the commentary in the bank’s one-page statement for clues about its thinking on the trajectory of the economy.

The bank’s statement also said while recent government policy measures on real estate have contributed to more sustainable outlooks for household debt, the rules have yet to have a substantial cooling effect on hot housing markets.

On core inflation, the bank noted that recent readings for its three measures, which reduce the influence of some more volatile consumer items like gasoline, have stayed below its ideal target of two per cent. That signals the entire economy has yet to catch up to the recent momentum.

Federal Reserve Chair Janet Yellen said Monday that the central bank is close to achieving its goals on employment and inflation. Her remarks could be seen as providing support for gradual increases in interest rates.

While expressing satisfaction with how the economy is performing, Yellen did voice concerns about moves in Congress to limit the Fed’s independence.

Yellen told an audience at the University of Michigan that unemployment is now below the point the Fed views as full employment, dipping to 4.5 per cent in March. A key inflation gauge is moving toward the Fed’s 2 per cent target for price stability.

Yellen did not specifically address the timing for future rate hikes, but her remarks support the view that future hikes are coming. The Fed last raised rates in March, a quarter-point move that was the second increase in three months.

“We are doing pretty well” in terms of the Fed’s goals, Yellen said. “The economy is growing at a moderate pace.”

The Fed’s next meeting is May 2-3 and most private economists believe a rate hike at that time is unlikely. But they say rates could be raised at the June meeting and again in September.

In her comments, which came in the form of a discussion led by Susan M. Collins, dean of the university’s Gerald R. Ford School of Public Policy, Yellen expressed concerns about moves in Congress to limit the central bank’s independence.

She specifically mentioned legislation that would subject the Fed’s decision on interest-rate policies to review by the Government Accountability Office, the auditing arm of Congress. She also cited a proposal to require the Fed to follow a specific formula for setting interest rates with any deviation from that formula subject to GAO reviews.

“Our independence is under some threat,” Yellen said, citing the various bills that have been introduced. She said these changes could end up harming the Fed’s ability to manage the economy to promote low unemployment and guard against accelerating inflation.

“The independence of a central bank to make decisions about monetary policy free of … political pressures is very important,” Yellen said.

Last week, the Fed revealed that officials had discussed at their March meeting the timing for the start of a process of reducing the central bank’s holdings of Treasury bonds and mortgage backed securities, which the Fed purchased as a way to lower long-term interest rates and jump-start economic growth following the 2007-2009 recession.

The minutes of the Fed’s March discussion showed that officials discussed beginning to reduce the Fed’s $4.5 trillion balance sheet by the end of this year sooner than many investors had been expecting.

Yellen was not asked about the timing for a reduction in the Fed’s balance sheet during her Ann Arbor appearance, but other Fed officials have indicated in recent days that they could support efforts to gradually trim the bond holdings beginning by the end of this year.

When the reduction in the Fed’s holdings does begin, that will likely to put further upward pressure on long-term interest rates such as home mortgages.