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Tag Archives: Canadian Interest Rates

Bank of Canada Reduces Policy Rate by 25 Basis Points

Key Highlights from Bank of Canada’s June 5th Announcement:

  1. Interest Rate Cut: The Bank of Canada has reduced its key overnight rate by 25 basis points to 4.75%, marking the first rate cut in four years. This decision comes after maintaining a 5% rate since July 2023. The cut aligns with market expectations and signals the beginning of a shift towards more normal interest rate levels.
  2. Monetary Policy Shift: This move indicates the central bank’s easing stance after a prolonged period of battling inflation. Although the policy remains restrictive, it represents a step towards lessening the financial burden on borrowers.
  3. Lower Inflation: Persistently lower inflation over the past year has enabled this rate cut. The Bank of Canada’s core CPI measures, including CPI trim, CPI median, and “supercore,” have shown significant easing, averaging 1.85% on a three-month annualized basis as of April 2024.
  4. Labour Market Conditions: The BoC highlighted softening labour market conditions, with employment growth lagging behind the working-age population, and wage pressures moderating gradually.
  5. Future Rate Cuts: The Bank of Canada forecasts continued easing of price pressures and expects headline CPI to reach the 2% target by 2025. While no specific pace for future rate cuts was provided, it is anticipated that there will be three more rate cuts this year, potentially bringing the overnight rate to 4% by the end of 2024.

The next scheduled date for announcing the overnight rate target is July 24, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

We’d welcome an opportunity to discuss the perspectives presented in this Bank of Canada Reduces Policy Rate by 25 Basis Points. Please contact our team today at (416)925-3140 or (613)366-8525 or by e-mail.

Bank of Canada Maintains Policy Rate — Continues Quantitative Tightening

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

The global economy continues to slow and inflation has eased further. In the United States, growth has been stronger than expected, led by robust consumer spending, but is likely to weaken in the months ahead as past policy rate increases work their way through the economy. Growth in the euro area has weakened and, combined with lower energy prices, this has reduced inflationary pressures. Oil prices are about $10-per-barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have also eased, with long-term interest rates unwinding some of the sharp increases seen earlier in the autumn. The US dollar has weakened against most currencies, including Canada’s.

In Canada, economic growth stalled through the middle quarters of 2023. Real GDP contracted at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter. Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.

The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices. Combined with the drop in gasoline prices, this contributed to the easing of CPI inflation to 3.1% in October. However, shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs. In recent months, the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.

With further signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

The next scheduled date for announcing the overnight rate target is January 24, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

We’d welcome an opportunity to discuss the perspectives presented in this Bank of Canada Maintains Policy Rate — Continues Quantitative Tightening. Please contact our team today at (416)925-3140 or (613)366-8525 or by e-mail.

Cooling inflation reinforces a Bank of Canada Rate Pause

Highlights:

  • Inflation slows: October inflation slowed more than expected to 3.1%, contributing to a pause in Bank of Canada rate hikes
  • Mortgage rates remain high: Despite lower bond yields, fixed mortgage rates are high, but expect rates to come down another 10 – 20 basis points (“bps”) over the next couple weeks if bond yields hold
  • Home sales slide across the country: Home sales were down across the country in October, led by Alberta (-8.3%)

Canada’s headline inflation rate slowed more than expected in October, coming in at 3.1% annually compared to expectations of 3.2%. The slowdown was due primarily to a 6% monthly decline in gasoline prices.

Slowing inflation—together with weakening GDP growth (Q3 is shaping up to be flat or slightly down) and a rising unemployment rate (up 0.7% in the past 6 months) —paints a compelling picture of an economy shifting into a lower gear.

It certainly looks at this point like the Bank of Canada is done hiking for the foreseeable future. Markets are now pricing in a Bank of Canada pause until April 2024, followed by 75 bps of rate cuts by the end of next year.

Mortgage Market Update

Government bond yields are a major determinant of fixed mortgage pricing. The bellwether 5-year Government of Canada bond yield is reflecting the likelihood of rate cuts in 2024 and has fallen by roughly 50 bps, or 0.5%, over the past six weeks.

Meanwhile, fixed mortgage rates—which are heavily influenced by bond yields —have remained stubbornly high, with average deep-discounted rates down by just 10 bps from the recent peak.

Lenders have a long history of quickly raising mortgage rates to match bond yields on the way up, but being slow to pass on cost savings when bond yields fall. We should expect rates to come down another 10 – 20 bps over the next couple weeks if bond yields hold here.

Household loan growth falls below 3%

With rates still elevated, household borrowing remains tepid. Loan growth fell to just 2.9% year-over-year in September…the first sub-3% “print” since 1983. Mortgage growth slowed to just 3.2% year-over-year and 0.2% on a monthly basis. It would be even lower were it not for the impact of negatively amortizing static-payment variable rate mortgages at several big banks.

Mortgage originations remain roughly 40% below peak and will likely remain below normal levels for the next year before the wave of mortgages originated in the 2020-to-early 2022 boom era begin to renew in 2025.

New originations continue to be heavily skewed to shorter-term fixed rate loans, but we are seeing some signs that that popularity of variable rate loans is beginning to rise again, having grown from 5% of originations to closer to 10% in the past two months.

Affordability eases slightly

Any improvement in affordability, however modest, is welcome news these days. The monthly mortgage payment required to purchase a typical home in Canada fell by $59 in October as a function of a slight decline in both interest rates and house prices.

With affordability still deeply strained, demand remained under considerable pressure in October. Seasonally adjusted home sales nationally posted the largest monthly decline since June of last year, falling 5.6% month-over-month. All big provinces posted substantial declines led by Alberta (-8.3%) and British Columbia (-6.9%). Ontario saw a 5.5% decline while Quebec saw a sales drop of 5.1%.

The market balance continues to tilt towards buyers with the sales-to-new listings ratio falling below 50% nationally for the first time since 2012.

Consequently, house prices have come under renewed pressure with the MLS House Price Index posting a 0.8% monthly decline in October.

It’s important to remember that there is no single “Canadian” real estate market. Regional dynamics vary widely, and this becomes abundantly clear when we look at the change in house prices over the past three months in major Canadian cities. It’s clear that major metros in southern Ontario are driving the national weakness, while Alberta and eastern Canada continue to perform well for now.

*Any forecasts contained in this report are accurate as of the date indicated

We’d welcome an opportunity to discuss the perspectives presented in this Q3-2023 Housing and Mortgage Market Review. Please contact our team today at (416)925-3140 or (613)366-8525 or by e-mail.

Tiff Macklem, BoC | Fighting to get back to low inflation

HIGH INFLATION MAKES LIFE HARDER FOR EVERYONE

Distinctive Advisors is pleased to provide you with the highlights from the Wednesday, November 22nd speech by Governor Tiff Macklem, Bank of Canada (“BoC“), outlining how high inflation is hurting Canadians and how monetary policy is working to bring it down. He also explains why the Bank of Canada must stay the course in its inflation fight.

The economy and job market have done quite well since the worst of the COVID-19 pandemic.

But Canadians aren’t happy—and high inflation is a major reason why.

Almost 9 out of 10 people responding to BoC‘s Canadian Survey of Consumer Expectations (“CSCE“) said high inflation has made them feel worse off. BoC can see the impacts of high inflation in other ways too:

  • Labour strikes have increased, with employers and workers struggling to agree on fair pay.
  • Businesses have been raising their prices more often than usual, and by larger amounts.
  • The CSCE survey show families are spending less and trying to find cheaper goods and services.

High inflation is particularly hard for lower-income Canadians. They have little savings to buffer higher prices, and necessities—food, rent, gasoline—have had some of the fastest price increases.

LOW UNEMPLOYMENT IS NOT BOOSTING CONSUMER CONFIDENCE

INFLATION WAS ESPECIALLY HIGH AND HARMFUL IN THE 1970s

Back in the ‘70s, just as now, global economic forces caused prices to climb around the world. However, inflation rose higher then, and remained high for longer, peaking at almost 13% and averaging more than 7% for the decade.

With such high inflation throughout the ‘70s, that decade also had a lot of strikes— many of which were long and heated. People felt ripped off because they’d get raises but prices would keep on rising.

Policy-makers tried to get inflation down, but their measures were either ineffective or too timid. Eventually, it took very high interest rates and a deep recession with high unemployment to lower inflation.

IN 1981, THE POLICY RATE AND MORTGAGE RATES CLIMBED ABOVE 20%

ADVANTAGES WE HAVE THIS TIME AROUND — WHAT’S DIFFERENT TODAY?

Tiff Macklem expressed confidence that we will get back to low inflation more quickly and at lower economic cost than we did in the 1970s. In his opinion, we have learned the bitter lessons from that time. And we’ve got some distinct advantages this time around: an inflation target with a strong track record and a forceful and sustained response.

BoC began targeting inflation more than 30 years ago. Since 1995, their inflation target has been 2%, the middle of the band of 1% to 3%. Between then and when the pandemic hit in 2020, inflation averaged 1.9% and was within that band 80% of the time — BoC’s expressed view is a remarkable success compared with the 1970s and 1980s.

Click here for a transcript of the full remarks from November 22nd, 2023 by Tim Macklem, Governor of the Bank of Canada.

 

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  1. Evaluate your current market position and help you assess your future market position based on your plans and goals;
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  3. Help assess your options including holding real estate, disposing of it, acquiring it or leasing it.

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