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The December inflation numbers are in -- and they could lead to a rate hold

Consumers can breathe a – small – sigh of relief this morning, as the pace of inflation loosened ever so slightly, perhaps paving the way for stabilized mortgage rates in the near future.

The headline Consumer Price Index rose 6.3% in December, following a 6.8% November print, and is down 0.6% on a monthly basis – the largest month-over-month decline seen since April 2020.

Core inflation – which strips out food and energy costs – rose 5.3%, down slightly from the 5.4% reading the previous month.

While the decline is largely attributed to cheaper prices at the pump – down -13.1% from November – a notable factor is a dip in the “homeowners’ replacement cost” category, which rose just 4.7% and reflects the overall cooler conditions in the housing market.

However, rising mortgage rates offset those declines and continue to put upward pressure on inflation. According to Statistics Canada, the mortgage interest cost index sits 18% higher than it did a year ago, up from a 14.5% year-over-year increase in November. Rising prices for clothing, footwear, and personal supplies and equipment also rose, adding additional pressure to the reading.

Meanwhile there wasn’t much downward movement for the other big line item squeezing consumer wallets; grocery costs rose 11% in December, a scant difference from the 11.4% increase recorded in November.

What this month’s inflation reading means for mortgage rates

As consumers are keenly aware, inflation has been running hot over the last year, following the full re-opening of the economy. In response, the Bank of Canada has had to hike its trend-setting Overnight Lending Rate – the benchmark cost of borrowing that lenders use to set their variable-rate mortgage and HELOC pricing – seven times since last March, from a pandemic low of 0.25% to 4.25% today.

Analysts have eagerly awaited today’s inflation report for key insights as to the central bank’s next move; signs that the metric is starting to respond to tighter monetary policy could indicate it’s getting closer to ending its hiking cycle, and may even hold rates in the upcoming announcement on January 25th.

Expectations had been mounting that the Bank of Canada is likely to implement one more 25-basis-point increase this month, following a stronger-than-expected labour market report, and November’s own hot CPI reading. However, today’s data is what the central bank wants to see: evidence that its hiking efforts are now trickling through the economy and are cooling consumer demand and spending.

"Today’s Consumer Price Index provides the Bank of Canada with the data to either implement a rate hold or a 25 basis-point increase. Regardless, inflation moving down is good news for existing variable-rate holders and anyone who requires a fixed-rate mortgage in the near future,” says James Laird, Co-CEO of and President of CanWise mortgage lender.

“If the Bank chooses to increase rates next week and if inflation continues to move in the right direction, consumers should look to March for the first rate hold since January 2022.”

In fact, today’s reading comes in slightly lower than what some economists had anticipated; in an analysis released earlier this week, RBC economists Clare Fan and Nathan Janzen anticipated a 6.4% print, which could lend to a central bank rate hold rather than a hike. 

Adding to this is the “dovish tone” of the Bank’s fourth-quarter consumer and business expectation surveys released this week, which point to slowing economic growth in the coming months; business owners report that higher interest rates are whittling their profitability, with most anticipating a mild recession over the next year.

“We continue to expect a 25 basis point increase to the overnight rate on January 25th, but a pause is not entirely off the table given the relatively dovish undertone from today’s survey,” wrote Fan in an additional economic update note.

What if the Bank of Canada hikes rates again next week?

While today’s inflation report could mean some short-term relief for rate hikes, borrowers with variable-rate mortgages should prepare to absorb at least one more small increase in the first quarter of this year. 

Let’s take a look at how another  Bank of Canada hike will impact monthly payments.

According to's mortgage payment calculator, a homeowner who put a 10% down payment on a $626,318* home with a 5-year variable rate of 5.30% amortized over 25 years (total mortgage amount of: $581,160) has a monthly mortgage payment of $3,480.

If the Bank of Canada announces a 25-basis point rate increase next week, their variable mortgage rate will increase to 5.55% and their monthly payment will increase to $3,564.

This means that the homeowner will pay $84 more per month or $1,008 per year on their mortgage payments.


*December 2022 average home price in Canada was $626,318 (CREA)

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The bottom line

If the above scenario occurs, variable-rate mortgage holders with variable payments would see their monthly payments immediately increase. However, variable borrowers with fixed monthly payments will instead see more of that payment going toward their interest costs and less of it paying down their principal mortgage balance.

More borrowers may also be at risk of hitting their trigger rate (the point at which their payments only cover interest costs), or their trigger point, which means rising interest has eaten away all of the built-up equity made from previous payments, meaning they may now owe more on their mortgage than when they first purchased their home.

“Variable-rate and home equity line of credit (HELOC) holders should budget for a 25 basis-point increase. At the same time, they should be pleased that inflation is moving in the right direction, which should limit further increases in 2023,” says Laird.

“Anyone who requires a fixed-rate mortgage in the next couple of months should shop around frequently to ensure they are getting the best rates.”

For those wondering what their payment options are – such as locking into a fixed rate or extending their amortization – connecting with a mortgage broker can help assess your situation, and determine your next steps for your current mortgage, or for when it comes up for renewal.

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