Last week, the Bank of Canada decreased their rate by 0.25% to 4.5%, resulting in a drop in the Bank Prime Rate from 6.95% to 6.70%.

What does this mean for you?

If you’re on an adjustable-rate mortgage, your payment will decrease by roughly $15 per $100,000 of your balance. For variable rate borrowers whose payments remain the same, more of your payment will go toward the mortgage balance than interest, shortening the time it takes to repay your loan (the amortization).  Line of credit borrower’s interest costs have dropped by .25% as well.

First-time buyers will have a little more borrowing power in the marketplace now.

If you’re one of the 80% of mortgage holders looking to renew in 2024 or 2025, this reduction in interest rates could make things easier for you.

Waiting to buy?

A word of caution to those waiting for rates to decrease further before buying: rates and property values don’t typically move in the same direction. While rates are trending down, $500,000 today might buy you more than it will once rates drop further and property values start rising again.

Thinking of your renewal, even if it’s still a year or more away?

In today’s rate environment, many people have questions about mortgage renewals, even if they are still a few years away. Sometimes a quick chat can provide clarity and peace of mind.

Regardless of your situation, this is welcome news for Canadians across the country.

Feel free to give me a call to check in on your situation and explore potential options. I’m always happy to help!

Inflation unexpectedly slipped 0.1% (not seasonally adjusted) in June, following a 0.6% increase in May. This was the first decline in six months. The monthly decrease was driven by lower prices for travel tours (-11.1%) and gasoline (-3.1%).

The Consumer Price Index (CPI) rose 2.7% year over year in June, down from a 2.9% gain in May. The deceleration was mainly due to slower year-over-year growth in gasoline prices, which rose 0.4% in June following a 5.6% increase in May. Excluding gasoline, the CPI rose 2.8% in June.

Lower prices for durable goods (-1.8%) y/y also contributed to the slowdown in the all-items CPI in June, following a 0.8% decline in May. An increase in prices for food purchased from stores (+2.1%) moderated the deceleration, as well as a smaller decline for cellular services in June (-12.8%) compared with May (-19.4%).

The Bank of Canada’s preferred measures of core inflation, the trim and median core rates, exclude the more volatile price movements to assess the level of underlying inflation. The CPI trim was unchanged in June at 2.9%, above the market’s expectation of 2.8%. The CPI median fell two ticks to 2.6%.

The third chart below shows the 3- and 6-month moving averages for the average of median and trim CPI measured as an annualized percentage change. While the 3-month moving average has accelerated to about 3%, the 6–month measure has fallen to just over 2%.

Bottom Line

Today’s inflation reading is good news for the Bank of Canada, giving them leeway to cut interest rates next week. June marks the sixth consecutive month that the headline yearly inflation rate has been within the BoC’s target range, bringing the annual pace of price pressures back to its weakest levels since 2021.

Today’s inflation data will give the central bank confidence that the May rise in inflation was temporary. Annual inflation will reach the Bank’s 2% target by some time next year. This opens the way for the Bank to cut the overnight rate on July 24 by 25 bps to 4.5%.

According to Bloomberg News, traders in overnight swaps increased their bets that the Bank of Canada would cut rates next Wednesday, putting the odds at about 90% compared with 80% before the release.

Yesterday’s business and consumer outlook surveys point towards slowing growth in firms’ input and selling prices amid a weaker economic backdrop. Inflation expectations fell in June and are now in the BoC’s target range. Businesses are expecting weaker soft demand. The unemployment rate is trending higher, and the share of firms reporting labour shortages is near a record low. Companies’ expectations for wage increases over the next year have slowed. Overall, capacity constraints “have returned close to their historical average.”

The central bank flagged that consumer survey respondents still think domestic factors, including fiscal policy and elevated housing costs, are “contributing to high inflation.” Home-buying intentions are near historical averages, the bank said, and are supported by “strong plans” among newcomers to buy homes.

Another rate cut is coming next week, which will help to spur housing activity

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
Image Credit: Stockbyte on Canva

Canadian employment data, released today by Statistics Canada, showed a marked slowdown, which historically would have been a harbinger of recession. This cycle, immigration has augmented the growth of the labour force and consumer spending, forestalling a significant economic downturn. Nevertheless, the Bank of Canada will continue to cut interest rates by at least 175 basis points through next year. Whether they do so at their next meeting on July 24 will depend on the June inflation data released on July 16.

Canada shed 1,400 jobs last month, following a 26,700 increase in May. Economists had been expecting a stronger showing. Monthly job gains have averaged around 30,000 in the past year, while labour force growth has been more than 50,000, causing the jobless rate to rise. Full-time jobs declined marginally while part-time work edged upward. Job losses in June were led by decreases in transportation and warehousing, information and recreation, and wholesale and retail trade.

Regionally, jobs decreased in Quebec but rose in New Brunswick and Newfoundland and Labrador.

Population growth isn’t likely to slow shortly, meaning that anything short of about a 45k employment gain will increase the jobless rate. The jobless rate rose to 6.4%, up two ticks from a month earlier and 1.6 percentage points above the July 2022 cycle low. It is also the highest level since 2017 (excluding the pandemic). The rising unemployment rate aligned with the Bank of Canada’s rhetoric that higher interest rates damaged the labour market and strengthened the case for further rate cuts to support the economy.

Total hours worked were down 0.4% in June. On a year-over-year basis, total hours worked were up 1.1%.

Average hourly wages among employees increased 5.4% in June on a year-over-year basis, following growth of 5.1% in May (not seasonally adjusted). This won’t sit well with the central bank’s Governing Council, but they realize that wage inflation is a lagging economic indicator, and rapidly rising unemployment will ultimately dampen wage inflation.

The data were released at the same time as US payrolls, which showed hiring moderated in June and prior months were revised lower. This boosts the odds that the Federal Reserve will begin to cut interest rates in the coming months. Fluctuations in the loonie are often driven by the difference between US and Canadian interest rates, owing to the two countries’ tight economic links.

Bottom Line

Traders in overnight swaps increased their bets that the Bank of Canada will cut borrowing costs again in July, putting the odds at around two-thirds, up from around 55% before the release.

In a speech last week, Macklem said it’s “not surprising” that wages are moderating more slowly than inflation because wages tend to lag the trend in job growth. He also said the unemployment rate could rise further, but a significant increase isn’t needed to get inflation back to the 2% target.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Image Credit: Jason Hafso Unsplash

Refinancing your mortgage can significantly reduce your interest rate, lower monthly payments, or shorten your loan term. However, understanding when and how to refinance is crucial to maximizing the benefits. Moreover, restructuring your mortgage to align with new goals and life changes can bring the biggest value.

Refinancing purely to save on interest makes sense when there has been a significant enough drop in interest rates to justify the associated costs. Improved credit scores since you took out your original mortgage can also qualify you for lower rates too.  Additionally, increased property value boosts equity, which you can access for re-investment, debt consolidation, or purchasing your next property.

When discussing refinancing, we start by assessing financial goals. Adjusting a mortgage to help with monthly cash flow may look different than a mortgage structured to save on interest, but the two don’t have to be mutually exclusive.  Accessing home equity may also factor in.  But whatever your goal, I can shop across lenders, banks, and credit unions to ensure you get the best terms for you, without you having to do the legwork.

Assessing associated refinance costs will help determine whether refinancing is financially beneficial.  Understanding your lender’s prepayment penalties work will form part of that assessment.  Legal and appraisal fees sometimes factor in, but the overall cost may warrant the investment in better mortgage terms and building your long-term wealth.

Whether you’re nearing the end of your current mortgage term or you’re considering an early refinance, please feel free to reach out. I am always happy to help you discover the opportunities available to you.