The Bank of Canada Holds Rates Steady And Expects Rate Cuts Later This Year

General Kimberly Coutts 24 Jan

The Bank of Canada Holds Rates Steady And Expects Rate Cuts Later This Year

Today, The Bank of Canada held the overnight rate at 5% for the fourth consecutive meeting but provided an outlook suggesting that monetary easing will begin by mid-year. The Bank forecasts a soft landing for the Canadian economy, with inflation falling to 2.5% by the end of this year. While some economists predict a recession, the Bank suggests that “growth will likely remain close to zero through the first quarter of 2024” and “strengthen gradually around the middle of 2024.” This would be a soft landing.

While inflation ended 2023 at 3.4%, owing mainly to high and sticky shelter costs, “the Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.”

The press release says that the “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 now believes the economy is in excess supply, inflation expectations and corporate pricing behaviour are moving in the right direction, and wage demands, at 5.4% year-over-year in the last reading–are still too high. Wages are a lagging indicator and with job vacancies returning to pre-pandemic levels, wage pressures are likely to dissipate as the year progresses.
 

Today, the tone was much more optimistic, suggesting that policymakers are increasingly confident interest rates are restrictive enough to bring inflation back to the 2% target. Still, Bank officials want to see more progress on core inflation before it begins to ease. It said, “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.”

The central bank focuses on “the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour” and remains resolute in restoring price stability.

Bottom Line

This was a more upbeat Bank of Canada statement. There is a good chance that monetary tightening has done its job, and inflation will trend downward in the coming months. As we have seen, the road to 2% inflation is bumpy, but we are heading there probably sooner than the Bank expects. As predicted, they are staying the course for now, but multiple rate cuts are likely this year. The scheduled dates for announcing the policy rate are March 6, April 10, June 5 and July 24. The Bank of Canada will begin cutting the overnight rate somewhere in there.

For now, my bet is on the June meeting, but if I’m wrong, it will likely be sooner rather than later. Once they begin to take rates down, they will do so gradually, 25 basis points at a time, and over a series of meetings. We could well see rates fall by 100-to-150 bps this year. Risks to the outlook remain, as always.

I do not expect the overnight policy rate to fall as low as the pre-Covid level of 1.75% this cycle. Inflation averaged less than 2% in the five years before COVID-19, depressed by increasing globalization and technological advances. Those forces are now reversed.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian Inflation Rises to 3.4% Y/Y In December

General Kimberly Coutts 16 Jan

A Bumpy Road To The Inflation Target

Canada’s headline inflation number for December ’23 moved up three bps to 3.4%, as expected, as gasoline prices didn’t fall as fast as a year ago. These so-called base effects were also evident in the earlier US inflation data for the same month.

Additional acceleration came from airfares, fuel oil, passenger vehicles and rent. Prices for food purchased from stores rose 4.7% yearly in December, matching the increase in November (+4.7%). Moderating the acceleration in the all-items CPI were lower prices for travel tours.

On a monthly basis, the CPI fell 0.3% in December after a 0.1% gain in November. Lower month-over-month price movements for travel tours (-18.2%) and gasoline (-4.4%) contributed to the monthly decline. The CPI rose 0.3% in December on a seasonally adjusted monthly basis.
 

Two key yearly inflation measures that are tracked closely by the Bank of Canada and filter out components with more volatile price fluctuations — the so-called trim and median core rates — increased, averaging 3.65%, from an upwardly revised 3.55% a month earlier. That’s faster than the 3.35% pace expected by economists. The trim rate rose due to the movements of rent and passenger vehicle prices.

Another important indicator, a three-month moving average of underlying price pressures, rose to an annualized pace of 3.63% in December from 2.94% in November, according to Bloomberg calculations. The Bank of Canada follows this metric closely because it reveals shorter-term inflation trends.

According to Bloomberg News, following the release of today’s CPI data, “the yield on two-year Canadian government bonds rose about four basis points to 3.857%…Traders in overnight swaps pushed back bets on when the Bank of Canada will start cutting rates to July, from as early as April before the release.”
 

Bottom Line

This is the last major data release before the Bank of Canada meets again on January 24th. I concur with the widely held view that the rate pause will continue at the next meeting despite evidence that the economy is slowing. Governor Tiff Macklem will err on the side of caution before beginning to cut overnight rates. The last reading on wages showed a 5.4% y/y rise, and yesterday’s housing release showed a bump in sales. Macklem and Co. will keep their powder dry until they see an all-clear signal that core inflation is sustainably below 3%.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

A look back at 2023 and what’s ahead for 2024!

General Kimberly Coutts 10 Jan

As 2023 draws to an end and a new year begins, let’s look back on Canada’s economic landscape and ahead to what the economists foresee in 2024.

The past year demonstrated Canada’s economic resilience through robust job growth and increased investments at the beginning of the year. However, by year’s end, the current high-interest rates had contributed to a slowdown in business and consumer activities, leading to forecasts of weaker growth in the first half of 2024. Despite this, economists anticipate the economy to begin to rebound in the latter part of 2024.

In 2023, the inflation rate began at 5.9% and gradually decreased to 3.1% by November (pending December’s data). While the Bank of Canada doesn’t anticipate inflation reaching its 2% target until late 2025, it aims for comfort within the 3% – 2.5% range. The evident impact of the Bank of Canada’s rate hikes has resulted in prospective buyers feeling priced out of the market, impacting consumer confidence and leading to a ‘wait-and-see’ approach throughout 2023. Concurrently, the Bank of Canada’s strategic rate adjustments have effectively moderated the housing market’s pace, contributing to a gradual slowdown without significantly affecting property values in most parts of the country.

In 2023, Canadians also came to terms with the reality that rock-bottom interest rates are a thing of the past, and these new normal rates are now a permanent fixture. While we will see some modest decreases in rates in the coming year, many Canadians will no longer be able to delay their entry into the housing market in hopes of further rate drops.

Now, let’s focus on what lies ahead in 2024:

There are emerging signs indicating the tangible effects of the Bank of Canada’s (BOC) rate hikes are beginning to take root. Coupled with the anticipation of inflation dropping below 3%, we are finally witnessing movement in rates. Anticipated rate cuts from both the Bank of Canada and the US Federal Reserve have triggered a positive response in bond markets. This has resulted in lowered fixed rates, especially the 5-year rates, with some Insured rates dropping as much as 1%, fostering competition among lenders. As they gear up for the spring market, this competition benefits borrowers, especially first-time home buyers who have less than a 20% down payment.

There’s a glimmer of hope on the horizon for Floating Rate holders (Variable or Adjustable). Most economists and markets are predicting a potential 100 – 150 bps rate cut to the current policy rate in 2024. However, the transition won’t happen abruptly; the Bank of Canada (BoC) is likely to proceed cautiously, implementing gradual decreases while monitoring inflation and the economy. This will benefit Adjustable Rate holders with reduced mortgage payments and Variable Rate holders seeing a shift towards principal repayment.

With housing affordability and supply shortages pressing all levels of government, there will be a continued push for new construction developments aimed at bolstering the housing supply. Though this issue isn’t something that will be swiftly resolved within a year or even a few, it remains at the forefront of all levels of government, underscoring the ongoing necessity of addressing the housing shortage.

What this all means for you, the consumer:

It’s estimated that about $251 billion in mortgages will come up for renewal in 2024, with another $352 billion worth in 2025. As a result, many Canadians will soon face a significant increase in their monthly mortgage payment—a major expense—and will have to adjust their spending. With that said, many lenders are going to be competing for your business. Working with professionals like myself, with access to multiple lenders, is essential, allowing for better rates and products. It will also be important to get ahead of your renewal so you can adjust the family budget for a certain increase in your monthly mortgage payment.

For those dealing with high-interest debt, now is an opportune time to consider refinancing for debt consolidation, especially with declining rates, providing a chance to manage debt effectively. Consider this the “reset button” that can get you back on track and increase your monthly cash flow.

Finally, as there’s a growing anticipation that the period of interest rate hikes might be coming to an end, this prospect will rekindle buyer interest in the market. With the expected decrease in fixed and variable rates, increased purchasing power could spur more demand in the housing market, causing an uptick in values. Choosing a variable rate or a short-term fixed rate now enables you to buy before the surge in demand while also positioning yourself to secure a potentially lower rate in the near future rather than waiting for rates to drop significantly.

While uncertainties remain, it’s crucial for those planning mortgage transactions in 2024 to review their needs sooner rather than later. Together, we can determine the best course of action that suits your family’s budget and needs.

I’m here to assist whenever you’re ready.
Questions on your mortgage, or want to compare your mortgage to what is currently available? Please email me.