Bank of Canada Summary September 2023
Nest Mortgage • September 7, 2023
Governor Tiff Macklem and the Bank of Canada (BoC) made the expected decision this week: no change to the Overnight Rate [no change to Prime]. While the Bank has surprised markets in the past, this week’s hold was widely anticipated. What makes this instance unique is the growing body of evidence showing that higher interest rates are leaving their mark on the economy...
Unprecedented Data Points:
- Second quarter GDP figures fell significantly below expectations, contracting by 0.2% compared to anticipated growth of 1.2% to 1.5%.
- Despite substantial population growth, the economy should be thriving, but it's not.
Time Lag of Rate Impact:
- Generally, interest rates take over 12 months to exert their full influence. In the last year, we've seen a total increase of 1.25% in Q2 2022 and another 1.75% in rate hikes in Q3 2022.
- The July 2023 GDP numbers are showing the impact of these hikes, with sluggish growth.
Consumption and Employment Challenges:
- Total retail sales have plateaued, especially when adjusted per capita, reflecting the weight of higher interest rates on consumer spending.
- The unemployment rate has climbed by 0.5% in the last three months, further complicating the economic picture.
What does this mean for mortgages and rates?
Inflation is likely to persist at elevated levels for some time, but it won't prompt the BoC to act unless accompanied by a rebound in GDP growth and spending. As disappointing economic data advances expectations of rate cuts, we may experience downward pressure on fixed interest rates sooner than previously forcasted. Experts are nearing a consensus that the BoC has reached its ceiling on rate tightening, with inflation as the last obstacle before easing.
In these uncertain times, we are here to assist. Whether you're considering home buying or refinancing for improved cash flow, we can provide the answers tailored to your needs. Please don't hesitate to reach out to discuss your mortgage needs!
BoC (-0.50%) Holiday Rate Cut! 🎄
Who Knew? 🔮 As expected, or easily predicted, the Bank of Canada formally announced a 0.50% cut to the overnight rate earlier this morning. (click for official announcement) This adjusts Prime Rate down to 5.95%, the lowest level we’ve seen in the past two years, and demonstrates a clear signal that the BoC is doing everything possible to kick-start economic growth. A Green Light to Borrow Governor Tiff Macklem’s message is straightforward: borrowing just got cheaper, and more cuts could be coming. With inflation settling back around the 2% target, he’s effectively giving Canadians the go-ahead to take advantage of lower rates, even if average core inflation is still a touch above the goal. "We want to see growth strengthen," Macklem said, and he’s determined to make it happen.
BoC Update | How the Latest BoC Cut Impacts Your Mortgage
Prime Rate will drop from 6.95% to 6.70%.
Specific to variable rate mortgages, the Prime Lending Rate will drop by .25% to 6.95%
As anticipated, this week's Bank of Canada announcement kept the overnight rate unchanged. The Bank expects inflation to hover around 3% and drop below 2.50% later this year, aiming to reach the target of 2% by 2025. Wednesday marked the sixth consecutive "no change" announcement, although speculation persists that we should see rates, specifically Prime, drop by .75-1.00% by the end of 2024. Despite no movement being widely anticipated, it is disappointing that further insight into a housing market reset has now been postponed until the next scheduled decision on June 5th. With unemployment at a 26-month high and GDP underperforming, these are two indicators contradicting the notion of rates remaining "higher for longer".
In light of theIn the wake of today's Bank of Canada (BoC) announcement maintaining the overnight rate at 5.00%, Nest brings you a comprehensive overview of the current mortgage landscape. Prime Rates and payments for variable lending products remain unchanged following this non-rate event, leaving borrowers in a familiar position. While the BoC provided limited insight into the potential timing of interest rate cuts, consensus suggests we might witness the first rate cut materializing in June of this year. Despite the ongoing commitment to restoring price stability for Canadians, a message consistent since July 2023, it is essential to highlight key facets of today's mortgage landscape: 1. GDP: Canada's 4th Quarter (2023) GDP surprised with a 1% annualized growth rate, surpassing expectations. However, beneath the positive headline lies a complex narrative. The growth coincided with a population surge of approximately 430,635 people, equating to a 4% annualized growth rate. On a per capita basis, Canadians appear to be experiencing the intended tightening, a trend persisting in 5 of the last 6 quarters. Per capita GDP adjusted for inflation is now lower than Q4 2014, a noteworthy observation challenging the notion of an economy in need of restraint. 2. Labour: In January, Canada's Labor Force added 37,000 jobs, outperforming expectations, leading to a decline in the unemployment rate to 5.7%. However, a closer examination reveals some finer details. Despite adult population growth of 125,500 people, the labor force expanded by a much smaller 18,200. Additionally, the participation rate for the age group of 15-24 witnessed a concerning decline of 130,000 persons. Without this decline, the unemployment rate would be 0.5% higher. 3. Inflation: Canada's Headline Inflation Number registered below expectations at 2.9%. In the ongoing battle against inflation, there has been significant progress since CPI peaked at 8.1% in June 2022, now comfortably below the 3% threshold. Core measures, though still elevated at 3.4% and 3.3% respectively, are expected to ease further as higher rates prompt more mortgage holders to renew into lower interest rate mortgages. 4. Global Considerations: Economic performance and Bond yields have been influenced by global factors. While global economic growth slowed in the fourth quarter of 2023, U.S. GDP growth remained surprisingly robust and broad-based. Inflation in the U.S. and the Euro area continued to ease, accompanied by a notable rise in equity markets. What's Next? The looming question pertains to the BoC's eventual decision to ease interest rates. The per capita statistics and the intricate state of the Canadian economy are interwoven in unpredictable ways, with the wildcard being the surge in population growth. Inflation, triggered by demand exceeding supply, faces uncertainties on how pent-up demand will respond to rate cuts. The surge in Canada's population, almost double the pre-COVID growth, plays a crucial role in shaping the trajectory of the BoC's decisions. Since October 2023, significant drops in fixed mortgage rates have been observed, likely to persist gradually as markets anticipate rate cuts by the BoC. Current odds indicate at least one rate cut by this summer, and two more to follow before year-end ( market survey ). As we approach the Spring Market, optimism and demand gain momentum. If you've adopted a 'wait and see' approach, now is the opportune moment for a conversation. Preparing before the first rate cut is pivotal, as optimism will inevitably transition to confidence, and housing market activity will return to normal levels. Next BoC Announcement: April 10, 2024.
In light of the softening of the Canadian economy, the Bank of Canada opted to maintain its overnight rate for the fifth consecutive time earlier this month leaving Prime and variable product pricing unchanged. While "financial conditions have eased," the Bank also highlighted persistent inflationary pressures stemming from ongoing wage growth and robust immigration. This is exacerbated by the housing supply failing to keep pace. The Bank continues to emphasize the need for restrictive policy to bring inflation back within target, yet “the market” is no longer buying it! With subdued core inflation pressures, declining GDP and house prices, and a softening labour market, it is inevitable that the Bank will need to reduce rates to avoid severe economic consequences. Market consensus is the rate-tightening cycle has passed and both new and existing mortgage holders can look to much needed rate reprieve in 2024. Bond yields have dipped more than -100bpts since October, leading to lower fixed rates. Conventional 5-year fixed rates are offered at 5.69-5.99%, with a noteworthy offer of 4.99% for default-insured purchases. As fixed rates have only dropped -50bpts over the same period, expect further discounting in the weeks ahead. THE (MORGAGE) YEAR THAT WAS, AND WHAT LIES AHEAD?
Following weeks of surging rates, Canadian bond yields (which directed impact fixed mortgage rates) have retracted below the 4% threshold, shedding 26 basis points from the previous week's 16-year peak — a potentially temporary but welcome development.
The Bank of Canada (BoC) raised its overnight rate for the 10th time since March of last year, resulting in Prime rate to increase to 7.20%. Recent hikes are becoming increasingly challenging for Canadian borrowers as financial stress persists. Both inflation data and labor markets indicate signs of weakening, with higher borrowing costs being the main contributor to the Consumer Price Index (CPI). Although inflation has dropped from 8.1% to 3.4% over the past year, the BoC suggests “underlying price pressures appear to be more persistent than anticipated,” pointing to the three-month average of core inflation running between 3.5% and 4%. [BoC takeaway] “If new information suggests we need to do more, we are prepared to increase our policy rate further, but we don’t want to do more than we have to.” Nest Summary & Recommendation In terms of interest rates, the Bank of Canada considers a neutral policy rate to be between 2% and 3%. Currently, the policy rate stands at 5%, twice the midpoint of the neutral range. This places us in a restrictive territory, and the full impact of previous rate increases is yet to be felt. Consequently, an economic slowdown is expected, and the likelihood of a recession is high. These observations are not meant to be pessimistic but rather to highlight that a recession would lead to a reduction in the overnight rate, potentially returning it to a neutral or even stimulative level. While a significant drop below the lower end of neutral is not expected, it is reasonable to anticipate a decrease of approximately 2% in the Overnight Rate and Prime lending rates in the coming months and years. The timing and pace of these changes, however, remains uncertain. The most frequently asked question is: What should existing borrowers do with their variable rate mortgages? 5-year (high-ratio) fixed 5.09 - 5.19%* 5-year (conventional) fixed 5.79 - 5.89%* *rates subject to change. While switching to a fixed rate will provide interest rate relief today and guard from future rate hikes, it will not offer savings opportunities from future rate reductions. *It is worth noting that post the BoC announcement of a rate increase, bond yields (which predict fixed mortgage rates) actually dropped, indicating a possible turning point and the peak of higher interest rates. While it is difficult to imagine further rate increases, it remains a possibility. Nevertheless, the market is undecided on pricing in additional rate hikes. For potential homebuyers, the decision between shorter-term fixed rates and discounted variable rates is being weighed. While some trust issues and concerns about variable rates persist, objectively speaking, they are becoming viable options in certain situations. It may be prudent to wait and gather more data to gain a clearer understanding of the direction interest rates are heading. Consequently, longer-term fixed rates (4 and 5 years) are being ruled out in favour of shorter-term (1 to 3 years) or variable rates. Please note that every borrower’s risk tolerance and financial situation is unique. We encourage you to reach out to a Nest Mortgage Specialist to discuss a tailored mortgage strategy specific to your needs!