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Welcome to my research about how inflation influences mortgage rates in Canada. In this presentation, I'll go through the concept behind mortgage rate fluctuations, the role of inflation, and the real estate market in any change concerning mortgage prices. I hope this presentation helps you understand this critical aspect of the Canadian economy.

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The article above dives into the impact of rising interest rates on Canadian homeowners and the economy of the country. It points out that, due to how common shorter fixed-rate mortgage terms and higher household debt levels in Canada, homeowners are really affected by the interest rate increases. When the rates rise, mortgage payments also rise, which results in reduced spending between consumers, That has for effect to slows economic growth. The article also mentions the challenges faced by the Bank of Canada to find out the duration of maintaining higher rates of demand, since housing is a critical factor in this decision-making process. The article emphasizes the important role that housing has in the transfer of policy effects to the economy.

I choose this article due to its specificity concerning interest rate and their connection with the mortgage market. Plus the article gives us the important role the Bank of Canada has to play in adjusting the rate in fear of the economy taking a wrong turn.

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How interest rates affect Canadian consumers through housing

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Learn how rising rates in Canada affect homeowners & consumer spending. Explore the Bank of Canada’s strategy amid housing concerns. Dive into the impact on mortgages & economic decisions.

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When prices for things like gas and groceries go up, it makes your mortgage more expensive too. The Bank of Canada fights inflation by raising interest rates, which means if an individual uses a variable-rate mortgage, their payments go up right away. If they use a fixed-rate mortgage, it only affects the buyer at the moment of their renewal, since those rates follow bond markets. To save money, it is recommended to pay extra on your mortgage, renew early, or switch to a variable rate if it's cheaper. The article also informs us that inflation has dropped from 8.1% (2022) to 1.9% now, and the Bank of Canada recently cut interest rates to 2.75%, which helps lower some costs. But some experts worry Canada might be heading for a recession because the economy isn’t growing much. Bottom line? Inflation makes borrowing pricier, but there are ways to manage it.

Choose this article because it explains how the rise or low of inflation affects mortgages, Give sort of tips to help people in need of clarification, and has the latest data on the Canadian economy.

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How Inflation Affects Your Mortgage - Loans Canada

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The rapidly rising inflation rates are not only affecting food prices but mortgage interest rates as well. Find out how inflation may affect your mortgage.

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 Relationship Between Inflation and Interest Rates

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 Relationship Between Inflation and Interest Rates

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The website above dives into the relationship between inflation and interest rates, highlighting how central banks like the Federal Reserve (Fed) have the role of administrator and adjust rates to control/ Prevent inflation. When inflation does happen, the Fed increases interest rates in an attempt to reduce the percentage of borrowing and spending, slowing economic activity and lowering price pressures. Inversely, during low inflation or recessions, the Fed cuts rates to stimulate spending and growth. The Fed has a target of 2% inflation for economic stability, using the federal funds rate as a tool to influence broader borrowing costs. Inflation is measured through the CPI and PCE, Meanwhile excluding volatile food and energy prices in the count for inflations. However, rate changes have limitations, including time lags and inconsistent effects across different sectors of the economy sectors. Being educated in these areas helps People and businesses navigate Financial decisions.

I choose this article due to its heavy content and its introductory form. This website does an overall overview of my topic while still highlighting important terms and ideas. Compared to the other articles that are focused on a single topic this one gives an idea of what will the presentation be about. The information I found the most useful in this article is the mention of the FED and its implication in trying to keep the economy at a stable rate.

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Inflation and interest rates tend to move in the same direction because interest rates are the primary tool used by the Federal Reserve, the U.S. central bank, to manage inflation.

The Federal Reserve Act directs the Fed to promote maximum employment and stable prices. Since 2012, the Federal Reserve has targeted annual inflation of 2% as consistent with the stable prices portion of its dual mandate.

The Fed targets a positive rate of inflation, defined as a sustained rise in the overall price level for goods and services, because a sustained decline in prices, known as deflation, can be even more harmful to the economy. The positive level of inflation and interest rates also provides the central bank with the flexibility to lower rates in response to an economic slowdown.

In August 2020, the Federal Reserve adopted average inflation targeting. That framework committed Fed policymakers to hold inflation above 2% for a time to compensate for stretches when the inflation rate fell short of that target.

How the Federal Reserve Measures Inflation

The Federal Reserve's preferred inflation measure is the Personal Consumption Expenditures (PCE) Price Index. Unlike the Consumer Price Index (CPI), which is based on a survey of consumer purchases, the PCE Price Index tracks consumer spending and prices through the business receipts used to calculate the Gross Domestic Product (GDP).

The Fed also closely watches the core PCE Price Index, which excludes food and energy prices that are typically more volatile and tend to be less reflective of the overall price trend as a result.

How Changes in Interest Rates Affect Inflation

When the Federal Reserve responds to elevated inflation risks by raising its benchmark federal funds rate it effectively increases the level of risk-free reserves in the financial system, limiting the money supply available for purchases of riskier assets.

Conversely, when a central bank reduces its target interest rate it effectively increases the money supply available to purchase risk assets.

By increasing borrowing costs, rising interest rates discourage consumer and business spending, especially on commonly financed big-ticket items like housing and capital equipment. Rising interest rates also tend to weigh on asset prices, reversing the wealth effect for individuals and making banks more cautious in lending decisions.

Finally, rising interest rates signal the likelihood that the central bank will continue to tighten monetary policy, further tamping down inflation expectations.

Problems With Using Interest Rates to Control Inflation

As the chart above shows, policymakers often respond to changes in economic outlook with a lag, and their policy changes, in turn, take time to affect inflation trends.

Because of these lags, policymakers have to try to anticipate future inflation trends when deciding on rate levels in the present. Yet the Fed's adherence to its inflation target can only be gauged with backward-looking inflation statistics. These can range widely amid economic shocks that can sometimes prove transitory and other times less so.

"In short, if making monetary policy is like driving a car, then the car is one that has an unreliable speedometer, a foggy windshield, and a tendency to respond unpredictably and with a delay to the accelerator or the brake," former Federal Reserve chair Ben Bernanke said in 2004 while still a Fed governor.

Central banks trying to anticipate inflation trends risk making a policy error by needlessly stoking inflation with rates that are too low, or stifling growth by raising them.

In the case of the Federal Reserve, it must pursue its stable prices objective while also trying to maximize employment.

Interest Rates as a Monetary Policy Tool

The Federal Reserve uses the federal funds rate as its primary monetary policy tool. The federal funds rate, targeted as a range since 2008, is the overnight rate at which banks lend to each other over the very short term.

Traditionally, the Federal Reserve used open market operations-purchases and sales of securities-to adjust the supply of banking system reserves and hold the federal funds rate on target. Demand for reserves was the result of banking reserve requirements imposed to ensure the soundness of banks.

In the years following the 2008 global financial crisis, the focus of bank regulation shifted to capital buffer requirements and stress tests to ensure long-term solvency. In 2019, the Fed unveiled a policy of targeting the federal funds rate with two other rates it sets outright.

The interest on reserve balances (IORB) rate is what the Fed pays banks for overnight deposits in their Fed accounts. It sets an effective floor under the federal funds rate. Overnight reverse purchase agreements are a supplementary tool that pays a somewhat lower interest rate to non-bank money market participants for overnight deposits.

In 2020, the Federal Reserve eliminated reserve requirements for banks and other depository institutions.

The Bottom Line

Interest rates and inflation tend to move in the same direction but with lags, because policymakers require data to estimate future inflation trends, and the interest rates they set take time to fully affect the economy. Higher rates may be needed to bring rising inflation under control, while slowing economic growth often lowers the inflation rate and may prompt rate cuts.

The Fed targets a range of the federal funds rate, in part, by setting the rate it pays on banking reserve balances.

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What Is the Relationship Between Inflation and Interest Rates?

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Inflation and interest rates tend to move in the same direction because interest rates are the primary tool used by the Federal Reserve, the U.S. central bank, to manage inflation. The Federal Reserve Act directs the Fed to promote maximum employment and stable prices.

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​The article above Points out the great impact of the current inflation rise on Canadians and their mortgages. As inflation reached an all-time peak in nearly 40 years, the Bank of Canada responded by raising interest rates to stabilize the economy. This action directly hits variable-rate mortgages, leading to significantly higher interest payments for homeowners. The article gives tips to homeowners on how to monitor interest rate trends and possibly compare mortgage rates to reduce the financial stress caused by rising rates. They talk about the benefit of hiring a mortgage broker to assimilate the changes and have favorable terms. I chose this article because it dived deeper into the way of protecting Canadians agent the financial crisis ahead and the risk of ending in a bad situation due to a rise in interest rates.

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Inflation is impacting your mortgage rate. Here's what you can do about it

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Inflation is at its highest level in nearly 40 years. Those with variable-rate mortgages should consider comparing mortgage rates to offset rising interest rates.

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This video explains how the changes in interest rates influence the Canadian housing market and the public economy. It points out how rising rates raise mortgage costs, lowering the availability for homeowners and buyers. The video also discusses the Bank of Canada’s role in adjusting interest rates to control inflation and its impact on the real estate market. Moreover, it hit on the possible risks of economic slowdown due to high borrowing costs.

This video gives the viewer a clear connection between interest rates and the pricing of homes. One key point to remember is the explanation of how higher interest rates don't just affect mortgages but also the average consumer spending and overall economic growth.

Not like the other videos, this video effectively shows how homeowners with variable-rate mortgages are vulnerable to rate hikes.

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Mortgages Rates paying the price for government policies.

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Will Lower Mortgage Rates Be Enough? Canada's Productivity Crisis Exposed!

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Will Lower Mortgage Rates Be Enough? Canada's Productivity Crisis Exposed!

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This video explains how Canadian mortgage rates are influenced by a lot of factors like inflation, government decisions, and especially global events like wars or economic crises. It breaks down the key differences between fixed-rate mortgages and variable-rate mortgages and provides an explanation of how bond yields are basically the cost banks pay to borrow money. What makes this video one of a kind is how it connects economic trends on a big picture to real-life mortgage costs, showing that rate changes aren’t random but tied to larger financial systems. This helps the viewers understand why mortgage payments might go up or down and how global events can impact their finances. It makes financial concepts easy to grasp when if explained by a website it would be confusing and shows the real-world impact of economic.

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Will Lower Mortgage Rates Be Enough? Canada's Productivity Crisis Exposed!

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This video breaks down how raising interest rates helps control inflation raise which is usually done by the Bank of Canada. Basically, when rates go up, loans and mortgages become more expensive, therefore people borrow and spend less. This causes the economy to slow down, which eventually helps stabilize prices. The video also explains the "lag effect" It takes months for rate movement to actually impact inflation, so the Bank has to be patient and careful not to overdo it. What makes this video special is that it gives an in-depth look at how the Bank of Canada decides when and how much to raise rates to keep the economy balanced. It shows the real purpose behind rate hikes and explains why changes don't work instantly.

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How Rising CPI Rates Impact Real Estate: Inflation, Interest Rates & Mortgage Security

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Affect of tariffs on canadian Mortgage Rates?

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Affect of tariffs on canadian Mortgage Rates?

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This video points out the issue with the recent tariff placed by the USA on Canada and how that changes the real estate market and mortgage prices. One of the main issues is the sudden drop in the value of the Canadian dollar. On one side upcoming fixed-rate mortgages will be put in for a better price. The Bank of Canada has planned to start dropping the interest rate by a small amount. Amout that risk to get higher depending on the length the tarifff are maintained for. One certainty is the uncertainty of Canada's economic status faced by this tariff even by the Bank of Canada. Another strong point made in the video is the floating of the Toronto real estate market by supply, Which means that a lot of houses are on the market but no one is willing to buy them due to the threat of the tariff and how they will affect the mortgages of a possible buyer. I chose this video because it was about an ongoing issue in our societies and it made a point to alarm us of the possible bait it could be to buy a house at the moment but also told us the danger of the tariff still being imposed.

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How Will the Tariffs Affect Canadian Mortgage Rates?

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The image shows the cycle of Inflation and how it reduces the value of the dollar, which makes mortgage-backed bonds less valuable. Investors then sell these bonds, causing their prices to drop and their rates to rise. Since mortgage rates are based on these bonds, mortgage rates go up. I choose this image to portrait the cycle on inflation and introduce how the mortgage price gets affected.

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This image shows how interest rates impact how much home you can afford for the same $1,000 monthly mortgage payment. In 1985, with a high 12.22% interest rate, you could afford only a $95,550 home. By 2000, with an 8.29% rate, that amount increased to $132,500. Now, with a lower rate of 3.89%, you can afford a $212,250 home. The key message is that lower interest rates let you buy a more expensive home for the same monthly cost, than higher ones. I chose this image to show how over the years the rate changes have heavily affected the cost of homes.

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What did you learn about your topic that surprised you the most?

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What did you learn about your topic that surprised you the most?

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The part of this topic that surprised me the most was the realization that the Bank of Canada has so much power over the economy of the country. I started to wonder about how would the country recover if the person managing the bank were to commit mistakes and how I think a single organization having such power can be dangerous.

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Provide a real-life example of how this topic is relevant or interesting for you.

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Provide a real-life example of how this topic is relevant or interesting for you.

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This topic is relevant to me in real life because my mother just bought a house a few year ago and I now wonder which type of mortgage she is one and especially if the tariff hit impacted her positively or negatively.

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If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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The most important knowledge id pass on is to examine the market before buying a house because not doing so can end in being stuck paying for a mortgage just after a drop in rate by the Bank of Canada.