Bank of Canada's New Forecasting Model Zeroes In on Mortgage Renewals
The Bank of Canada has implemented a new forecasting model called Prima to track mortgage renewals and their impact on inflation. This change brings Canada's renewal wave closer to the center of rate-setting, according to Governor Tiff Macklem.
Prima replaces an economy-wide supply and demand approach with one that splits households into three groups based on how they spend and borrow. The model treats mortgage interest costs as a component of the consumer price index (CPI), with changes in market rates passing through gradually as mortgages renew or refinance.
In a simulation of a 100-basis-point rate hike, Prima showed that mortgage interest costs rise as higher rates pass through to outstanding debt, while other owned-accommodation costs ease as housing demand and construction cost pressures weaken. This lag is seen by brokers every renewal season.