The Bank of Canada reduced its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%.This would be welcome news for those with variable rate mortgages and lines of credit, as they would see their interest costs reduced for the second time in as many months.
Bank of Canada Governor Tiff Macklem stated, “this decision reflects 3 considerations:
- Monetary policy is working to ease broad price pressures.
- With the economy in excess supply and slack in the labour market, the economy has more room to grow without creating inflationary pressures.
- As inflation gets closer to the 2% target, the risk that inflation comes in higher than expected has to be increasingly balanced against the risk that the economy and inflation could be weaker than expected.
Tiff went on to state “looking ahead, we expect inflation to moderate further though progress over the next year will likely be uneven. This forecast reflects the opposing forces affecting inflation. The overall weakness of the economy is pulling inflation down. At the same time, price pressures and shelter and other services are holding inflation up. We are increasingly confident that the ingredients to bring inflation back to target are in place. But the push pull of these opposing forces means that the decline in inflation will likely be gradual and there could be setbacks along the way. If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy rate. The timing will depend on how we see these opposing forces playing out, in other words we will be taking our monetary policy decisions one at a time.”
Tiff highlighted some economic dynamics in today’s Monetary Policy Report:
- Economic growth in Canada has picked up but remains weak relative to population growth.
- Household spending has been soft, pent up demand for new cars and travel is fading and many families are setting aside more of their income for debt payments leaving less money for discretionary spending.
- In the labour market, employment has continued to grow more slowly than the labour force. Job seekers are now taking more longer to find work and the unemployment rate has risen to 6.4%. The job vacancy rate has come down significantly and reports of labour shortages are now below normal. Overall, indicators suggests some slack in the labour market. Wage growth is also showing signs of moderating although it remains elevated.
- Looking ahead, economic growth is expected to increase in the 2nd half of 2024 and through 2025. This reflects stronger exports and a recovery in household spending as borrowing costs ease. Business investment is also expected to strengthen and residential investment is forecast to grow robustly. Overall, with the economy strengthening, excess supply will be absorbed next year and into 2026.
- CPI inflation moderated to 2.7% in June after increasing in May and broad inflationary pressures continue to ease. The Bank’s preferred measures of core inflation have now been below 3% for several months and the breadth of price increases across components of the CPI is near its historical average. Corporate pricing behaviour has largely normalized and near term inflation expectations have come down although they are still above normal. However, shelter price inflation remains high. Inflationary pressures are also elevated in services that are closely affected by wages, such as restaurants and personal care.
- The Bank’s preferred measures of core inflation are expected to slow to about 2½% in the second half of 2024 and ease further in 2025. CPI inflation is forecast to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices. As those effects wear off, CPI inflation may edge up again before settling around the 2% target next year. But it’s unlikely to proceed in a straight line.
- As always, there are risks around our inflation outlook, globally geopolitical uncertainty is high. Here in Canada, the biggest downside risk is that household spending could be weaker than expected. On the upside, inflation and shelter and other services could prove more persistent.
- To conclude, with broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points. In recent months, we have continued to make progress bringing inflation down. But now with the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations. We need growth to pick up so inflation doesn’t fall too much even as we work to get inflation down to the 2% target.
- Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably 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.
Tiff answered the difficult question of where interest rates are going. His answer was looking ahead, if inflation does move closer toward the target rate depending on incoming data and the opposing forces, there could be further cuts before the end of this year. They will be taking one meeting at a time. Senior Deputy Governor Carolyn Rogers did confirm that there is a structural imbalance from the record levels of immigration causing shelter price increases.
Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026. The next scheduled date for announcing the overnight rate target is September 4, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on October 23, 2024.
Highlights-
- New benchmark rate:4.50%
- Expected prime rate:6.70% (down from a recent high of 7.20%. TD Bank remains a unique case, with its mortgage prime rate priced 15 bps higher, the result of an additional hike the bank made in 2016 independent of a Bank of Canada rate move)
- 5-yr bond yield:3.27% (-2 bps)
- Updated GDP forecasts:
- 1.2% in 2024 (vs. 1.5% previously)
- 2.1% in 2025 (vs. 2.2)
- 2.4% in 2026 (vs. 1.9%)
- Updated inflation forecasts:
- 2.6% in 2024 (no change)
- 2.4% in 2025 (vs. 2.2%)
- 2.0% in 2026 (vs. 2.1%)
What this means for borrowers
The big winners today are existing variable rate mortgage holders, who will see their mortgage rate fall a quarter of a percentage point. Those with adjustable rate mortgages, whose payments fluctuate as rates change, will see their payments drop by about $15 per $100,000 of mortgage based on a 25 year amortization. That means that a borrower with a $400,000 mortgage can expect savings of roughly $60 a month following this latest rate cut. Taken together with last month’s rate reduction, these borrowers will now see their payments drop roughly $120 a month.
Those with fixed payment variable rate mortgages, comprising roughly 15% of outstanding mortgages in Canada, will experience a shift in their payment allocation. As the prime rate decreases, a larger portion of their payments will go towards paying down the principal, while the interest portion will reduce. Meanwhile, fixed rate borrowers can largely ignore today’s news, as their rate remains fixed for the duration of their term.
Sources: Bank of Canada, CMT, Announcement from Bank of Canada Governor Tiff Macklem & Senior Deputy Governor Carolyn Rogers