Bank of Canada Summary June 2022
Scott Gingles • June 1, 2022
Latest from the Bank of Canada: Another 50-basis Point Increase
As anticipated, The Bank of Canada increased its overnight rate target by 50 basis points today, continuing its policy of quantitative tightening.
Specific to Variable Rate Mortgage holders, Prime will increase from 3.20% to 3.70%.
The risk of elevated inflation becoming ingrained has increased. The Bank of Canada will use its monetary policy tools to return inflation to target and keep inflation expectations well established.
BoC Announcement Highlights:
- Russia’s ongoing invasion of Ukraine, lockdowns in China related to COVID-19, and continuous disruptions in the supply chain have driven inflation upward. There is intense pressure on agricultural and energy commodities due to uncertainty surrounding the war. Prices in the United States remain robust despite the contracting economy we saw in early 2022. Markets are volatile and financial conditions continue to tighten around the globe.
- The Canadian economy is strong and operating in excess demand. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity remains strong but is starting to moderate from extraordinarily high levels.
- CPI inflation has reached 6.8%, well above the Bank’s target, and is likely to move even higher before easing off. Inflation continues to broaden with core measures of inflation ranging between 3.2% and 5.1%.
A Look Ahead:
With the economy operating in access demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further. The policy interest rate is the Bank’s primary monetary policy instrument, and quantitative tightening will complement increases in the policy rate. The Bank’s commitment to achieving the 2% inflation target will be guided by ongoing assessments of the economy.
Fixed or Variable?
- Some of the best fixed-rate mortgages available today are 3.69-3.99%.
- By comparison, variable-rate mortgages are offered at a discount of 2.60%–2.75%.
- Fixed mortgage rates (conventional fixed rates averaging ~4.49% today) have priced in the expectation of the overnight rate reaching 2.75%. As of today, we're sitting at 1.5%. This means fixed rates are likely at or near the high of where they will be for the near future. Unless expectations for the overnight rate push to 3% or beyond, there is no urgency to convert to a fixed rate today. Your variable rate is still significantly lower (by 1.5% to 2%) than what you can ‘fix’ today.
- What we have experienced as of late is the most aggressive rate tightening cycle in more than 20 years. Since March 2022, we've seen a 1.25% increase to the overnight rate. Economic conditions are in constant flux, and it is incredibly difficult to predict the future. One thing is for certain, inflation will be reined in overtime and upward pressure on rates will then ease – the timing is the unknown piece of this puzzle.
Recommendation:
Despite today’s 50-basis point hike, and further increases expected, we still recommend Variable over Fixed as most variable mortgage holders are at ~3% (or lower).
If you have a variable rate mortgage or HELOC, your lender may contact you directly with an offer to ‘lock in’ or ‘convert’ your mortgage, if they haven’t already.
Here Are a Few Things to Consider Before Converting to Fixed:
If you lock in, you’ll be getting a new mortgage with a fixed rate and new terms.
Locking in does not secure your existing rate. You will be offered a new (higher) fixed rate with a term equal or longer than your existing mortgage term.
Penalties: Fixed-rate mortgages come with a much higher penalty should you break your mortgage early (up to 900% higher)!
Variable rates continue to be the lowest rates available.
Historical prime rate changes over the last 14 years have fluctuated as high as 4.50% and as low as 2.25%. While rates may fluctuate over the mortgage term, you will likely pay less interest overall.
Are interest rate increases keeping you up at night?
Statistically, most Canadians prefer fixed-rate products and are willing to pay more for the security of consistent payments. Before you lock into a fixed rate product, please contact us today to review your current lender’s offer.
Final Tips:
If you owe a considerable amount to your HELOC, it may be a good time to consider converting a portion of the balance into an amortized variable or fixed mortgage.
If you're thinking about purchasing a new home, contact one of our Mortgage Specialists today to secure a pre-approval ASAP. This way you are protected from potential rate increases while you consider your options.
If you have any questions or would like to discuss your specific mortgage details further, reach out to Nest Mortgage today!
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?
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!
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.