The Bank of Canada today reduced its target for the overnight rate to 4¼%, with the Bank Rate at 4½% and the deposit rate at 4¼%. Bank of Canada governor Tiff Macklem said if inflation continues to ease as expected, it is reasonable to expect more rate cuts this year. But he added if inflationary pressures prove to be stronger than expected, the central bank may slow down the pace of interest rate cuts. Canada’s annual inflation rate has been below three per cent for months, reaching 2.5% in July.
Highlights from the Bank of Canada:
- The global economy expanded by about 2½% in the second quarter, consistent with projections in the Bank’s July Monetary Policy Report (MPR). In the United States, economic growth was stronger than expected, led by consumption, but the labour market has slowed. Euro-area growth has been boosted by tourism and other services, while manufacturing has been soft. Inflation in both regions continues to moderate. In China, weak domestic demand weighed on economic growth. Global financial conditions have eased further since July, with declines in bond yields. The Canadian dollar has appreciated modestly, largely reflecting a lower US dollar. Oil prices are lower than assumed in the July MPR.
- In Canada, the economy grew by 2.1% in the second quarter, led by government spending and business investment. This was slightly stronger than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July. The labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.
- As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2 ½% and the share of components of the consumer price index growing above 3% is roughly at its historical norm. High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services.
- With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.
In a press release, the question of the recent announcement from the gov’t to reduce the number of temporary foreign workers to Canada as well as possibly greatly reducing the overall immigration numbers to Canada for permanent residents and what effect that will have on the economy specifically housing. Senior Deputy Governor Carolyn Rogers answered by stating, “the surge in immigration had a big effect on the Canadian economy. In the early rise of inflation and when we saw a lot of pressure on the labour market, it helped. It took some of that pressure off the labour market. It added supply, it took the steam out of the labour market, then gradually out of inflation. Where we are now is the Canadian economy is having troubles absorbing the number of workers into the job rate. We haven’t seen a big increase in unemployment but we have seen vacancies come down and we’re seeing the unemployment rate tick up a bit. So it will be important that influx of labour supply matches our ability to absorb it. This is something we’re watching closely. The gov’t has announced a target they intend to hit and they’ve announced a series of measures, we expect a few more, we need a bit more details on what is the execution path to that target. Because of the significant effect it has on the economy, it’s something we’re watching very closely.” According to Statistics Canada, across Canada, the population rose by 1,271,872 between Jan. 1, 2023 and Jan. 1, 2024. Statistics Canada says 97.6 per cent of that population growth was the result of immigration, with 471,771 of them settling in the country last year. This is the largest number of immigrants allowed entry in a year to Canada in history. Canada aims to still welcome 485,000 new permanent residents in 2024, 500,000 in 2025 and plateau at 500,000 in 2026 according to Statistics Canada but this may change as announced recently by the Feds. As Senior Deputy Governor Carolyn Rogers stated, the immigration did help the economy in the past so we will wait to see what the Feds will do from now on.
This was great news coverage explaining why the Federal Government allowed record numbers of immigration last year and this year to help the economy and bring more consumers: https://www.youtube.com/watch?v=LRUjmiUNjbc
https://www.youtube.com/watch?v=zV11Z437758
What this means for Mortage Holders:
Bank of Canada’s third consecutive interest rate cut is welcome news for variable rate mortgage holders. With the central bank bringing down it’s key lending rate to 4.25% amid softness in the economy and easing inflation, the banks in turn have lowered their prime rate to 6.95% which directly affects variable rate mortgages.
For every quarter percentage point decrease, a homeowner with a variable rate mortgage can expect to pay approximately $15 less per $100,000 of mortgage in monthly payments. Meanwhile, fixed rate mortgage holders will not see the effects of any mortgage rate decreases until renewal.
Variable mortgage rates are looking more attractive as they’re poised to lower in the near future, but if we’ve learned anything from the Bank of Canada’s rate hiking cycle, nothing is certain.
Sources: Bank of Canada, CMT, Statistics Canada, Announcement from Bank of Canada Governor Tiff Macklem & Senior Deputy Governor Carolyn Rogers