Sometimes it’s worth looking abroad and seeing what countries like Canada are saying and doing about inflation.
Canada does not set interest rates in a vacuum. Bond yields – the puppets behind fixed mortgage rates – typically move in global lockstep, so inflation trends abroad can provide clues for Canadian interest rate forecasts.
The central banks of Europe and Oceania often show their hand before the Bank of Canada plays its hand, and the central bank watches each one of them like a poker player looking for tells.
In other words, how comparable countries react to incoming inflation information offers clues about how Gov. Tiff Macklem’s team might respond to similar data.
In addition to the USA, I mainly keep an eye on three countries: Australia, Norway and New Zealand.
They are small, open, resource-linked economies that are structurally comparable to Canada in important respects.
So let’s take a little look at what they’ve been up to lately.
Australia (RBA): Streamlining
On May 5, the RBA raised the key interest rate by 25 basis points to 4.35 percent. It was the third consecutive increase this year and apparently not the last, according to overnight index swap prices from LSEG. The Australians blamed fuel inflation in the Middle East and domestic capacity pressures. The board signaled it could pause and consider, but pointed to upside risks. The markets assume that the key interest rate will reach 4.7 percent by the end of the year.
Norway (Norges Bank): Streamlining
Norges Bank unexpectedly increased yesterday by 25 basis points to 4.25 percent, its first increase since 2023. The committee cited stubborn above-target inflation, exacerbated by energy disruptions in the Middle East, and the risk of unfounded expectations (incidentally, one of the Bank of Canada’s biggest fears). Market implied prices suggest a rate of over 4.5 percent by year-end 2026.
New Zealand (RBNZ): on hold, hawkish bias
The RBNZ kept the OCR at 2.25 per cent on April 8 after the cut until 2025. The committee debated the timing of increases rather than cuts, citing a projected rise in inflation of 4.2 percent due to the oil shock. Kiwi markets are pricing in a 25 basis point increase this summer.
Canada’s wake-up call
The CANNZ economies (Canada, Australia, Norway, New Zealand) have fairly correlated policy rates, meaning they move together most of the time, particularly during global shocks.
It is important to note that these central banks recognize that employment is likely to weaken and inflation is expected to fall next year, yet they are raising interest rates anyway or are in the process of doing so.
That’s not the kind of thing Macklem misses. In today’s fast-moving, inflation-sensitive global economy, being the last central bank to adjust interest rates in response to rising prices is not a good look.
Granted, Canada doesn’t import inflation from CANNZ competitors like it does from the US
America’s appeal to our economy outweighs the impact of other resource-rich advanced economies.
And that cannot be overstated as Canada still faces downside risk due to upcoming US trade policies. However, Republicans’ expected losses in November’s U.S. midterm elections could weaken President Donald Trump’s control next year and theoretically make it less likely that he will continue to mistreat Canada.
In any case, the Bank of Canada needs to focus on the more immediate threat: oil inflation.
On Wednesday, Macklem hinted that “small” policy changes could be on the way. Although he doesn’t say in which direction, the market thinks it knows. Three rate hikes are priced in over the next year or so, with the first step coming in the fall.
Meanwhile, a synchronized hawkish stance could push global yields higher, and that would also have a marginal impact on Canadian bond yields.
To put it bluntly, if three independent central banks all conclude that inflation has not been defeated, it undermines the argument that disinflation is a done deal here. For risk-conscious mortgage buyers who need long-term financing, this is another reason to be conservative when choosing a term.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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