As anticipated, the Bank of Canada has reduced its target for the overnight rate to 4¾% (4.75%), the first cut in more than four years. In its statement, the Bank said “recent data has increased our confidence that inflation will continue to move towards the 2% target,” even though it admitted inflation risks remain. This is great news and hopefully will be the start of more relief to those affected by this rate cut. However, for future possible rate cuts, the bank will continue to monitor closely all data and all aspects of the economy and it will be a decision made at that time at the next and subsequent announcements.
- The global economy grew by about 3% in the first quarter of 2024, broadly in line with the Bank’s April Monetary Policy Report(MPR) projection. In the United States, the economy expanded more slowly than was expected, as weakness in exports and inventories weighed on activity. Growth in private domestic demand remained strong but eased. In the euro area, activity picked up in the first quarter of 2024. China’s economy was also stronger in the first quarter, buoyed by exports and industrial production, although domestic demand remained weak. Inflation in most advanced economies continues to ease, although progress towards price stability is bumpy and is proceeding at different speeds across regions. Oil prices have averaged close to the MPR assumptions, and financial conditions are little changed since April.
- In Canada, economic growth resumed in the first quarter of 2024 after stalling in the second half of last year. At 1.7%, first-quarter GDP growth was slower than forecast in the MPR. Weaker inventory investment dampened activity. Consumption growth was solid at about 3%, and business investment and housing activity also increased.
- Labour market data show businesses continue to hire, although employment has been growing at a slower pace than the working age population. Governor Tiff Macklem stated “this has allowed the supply of workers to catch up with job vacancies.” However, when you go the government website concerning immigration targets, nothing has changed. It still states: Following the trajectory of the 2023-2025 Plan, Canada aims to welcome 485,000 new permanent residents in 2024, 500,000 in 2025 and plateau at 500,000 in 2026 (read more here: https://www.canada.ca/en/immigration-refugees-citizenship/news/notices/supplementary-immigration-levels-2024-2026.html) The Federal Government has stated the purpose in historic immigration numbers was due to the labour shortage during and post the Covid Pandemic. However, this seems to no longer be the issue. CMHC (Canada Mortgage and Housing Corporation) & experts warn that not matching the population growth to housing by recent historic immigration measures and future, only exacerbates the housing shortage for people to purchase. However, the federal government is on a path to a more aggressive plan of spending over 70 billion for building rentals as announced in the last federal budget announcement. On a more personal note, having lived here all my life, the landscape has certainly changed. 9 to 10 out of 10 of my visits when grocery shopping, there are beggars outside the entrance and after speaking with them, found that 95% on average were recent immigrants to Canada. Hopefully the Federal Government will take a closer look at this.
- CPI inflation eased further in April, to 2.7%. The Bank’s preferred measures of core inflation also slowed and three month measures suggest continued downward momentum. However, shelter price inflation remains high.
- Wage pressures remain but look to be moderating gradually. Overall, recent data suggest the economy is still operating in excess supply.
With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive thereby reducing the policy interest rate by 25 basis points. The Governing Council is closely watching the evolution of core inflation and remains particularly focused 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.
What does it mean for consumers and prime rates?
The Bank of Canada’s benchmark rate affects borrowing costs for banks, which means they’re able, but not forced, to lower their own lending rates.
Banks are generally very quick to move their prime rate higher in tandem with Bank of Canada hikes. However, they’ve been less consistent on the way down.
By Wednesday afternoon though, most banks had lowered their prime rates to 6.95% from 7.2%, effective June 6, matching the drop from the central bank.
Canadian banks have more flexibility in deciding to cut than they used to. Banks choose how much interest they add to the Bank of Canada rate, and that buffer has widened over the past couple of decades. From the mid 1990s to 2008, the added margin averaged around 1.5%. It rose to 1.75% until around 2015, and since then has stood at around two per cent added to the bank rate.
What does it mean for my mortgage?
Banks lowering their prime rates will have an immediate effect on borrowers with variable rate mortgages, just as they’ve felt the brunt of rising rates.
It’s also important to note that not all variable rate mortgage holders will see their monthly payments change. Those with a fixed payment variable mortgage will instead see the interest portion of their payment decline, while the amount going towards principal repayment will increase.
How much savings on a mortgage can be expected from the rate cut?
A quarter percentage point cut doesn’t translate into a major change in monthly mortgage payments. Someone with a $600,000 mortgage, 25 year amortization and a six per cent interest rate would save about $88 a month if the rate was 5.75%. The quarter point rate reduction will translate into a savings of roughly $15 per $100,000 of loan or about $60 for recent first time buyers based on an average mortgage balance.
How does this affect you, the mortgage holder?
- Variable rate mortgages: The Prime rate changes from which these mortgages are priced and then from there, depending on the bank, the amount of discount you may receive (For example with one of my lenders, Prime at 6.95% minus the discount of 1.15%=5.80%). The rates have been coming in from various banks showing it falling primarily to 6.95% from the previous rate of 7.20% with the exception of TD, which has priced it at 7.10%. Overall, this will lower payments for variable rate mortgage holders except those with fixed payment variable mortgages where the payment stays the same and more will go towards the principle and less to interest.
- Fixed rate mortgage: Your mortgage is unaffected, your mortgage rate and term is exactly the same until it’s time to renew the loan. Fixed rate mortgage rates are determined by what happens to the bond market, which, while also affected by Bank of Canada rate decisions, is based on overall investor confidence. The market had already largely priced in the rate cut.
- HELOC (Home Equity Line of Credit): Helocs are generally tied to bank prime rates, I will know more in the coming days as major lenders are adjusting the rates.
Many will ask, why did TD not lower to the same rates as everyone else? Firstly, among the Big 6 banks, TD remains a unique case with it’s mortgage prime rate priced 15 basis points higher as the result of an additional hike the bank made in 2016 independent of a Bank of Canada rate move. So why not change now? One can only assume by pricing themselves out or appearing more expensive, just like any goods and services sold, they just don’t want to sell more of these unless they have to. Various reasons could be that they have reached their limit for these types of mortgages across Canada and/or view these mortgages as risky and may be difficult for clients and/or it’s just not a favored mortgage product for their portfolio, every bank has their own risk appetite. With the historical rate hikes to tame inflation, clients found their variable rate mortgage payments soared making life harder to have money left over to pay for other necessities including other debts. We will know more in the coming days whether there is better features for TD’s variable rate mortgages but for now, they have notified us this is their prime lending rate.
Summary:
Bank of Canada governor Tiff Macklem did say it’s “reasonable” to expect further cuts, but that the bank is making its interest rate decisions one at a time.
TD is predicting the central bank will cut rates two more times by the end of the year to bring the benchmark to 4.25%, while CIBC and RBC are predicting three more cuts which would bring the key rate to an even four per cent. A full percentage point off the $600,000 mortgage would translate into about $349 a month in savings.
The next scheduled date for announcing the overnight rate target is July 24, 2024. 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.
Sources: Bank of Canada, CMT, Various banks