Today, the Bank of Canada cut the overnight policy rate by another 25 basis points to 4.25%. This is the third consecutive decrease since June. The Bank’s decision reflects two main developments. First, headline and core inflation have continued to ease as expected. Second, as inflation gets closer to the target, the central bank wants to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2% target.

Overall, the economy’s weakness continues to pull inflation down. However, price pressures in shelter and some other services are holding inflation up. Since the July Monetary Policy Report, the upward forces from prices for shelter and some other services have eased slightly. At the same time, the downward pressure from excess supply in the economy remains.

Tiff Macklem said today, “If inflation continues to ease broadly in line with the central bank’s July forecast, it is reasonable to expect further cuts in the policy rate. We will continue to assess the opposing forces on inflation and take our monetary policy decisions one at a time.”

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. Together with the first quarter’s growth of 1.8%, the economy grew by about 2% over the first half of 2024. That’s a healthy rebound from our near-zero growth in the second half of 2023. The Bank’s July projection has growth strengthening further in the second half of this year. Recent indicators suggest there is some downside risk to this pickup. In particular, preliminary indicators suggest that economic activity was soft through June and July, and employment growth has stalled in recent months.

That makes this Friday’s Labour Force Survey data for August particularly important. We expect economic activity to slow in the third quarter to rough 1.3%, keeping the Bank in an easing posture through next year.

The unemployment rate has risen over the last year to 6.4% in June and July. The rise is concentrated in youth and newcomers to Canada, who find it more challenging to get a job. Business layoffs remain moderate, but hiring has been weak. The slack in the labour market is expected to slow wage growth, which remains elevated relative to productivity.

Turning to price pressures, CPI inflation eased further to 2.5% in July, and the central bank’s preferred measures of core inflation also moved lower. With the share of CPI components growing above 3% around its historical norm, there is little evidence of broad-based price pressures. But shelter price inflation is still too high. Despite some early signs of easing, it remains the most significant contributor to overall inflation. Inflation remains elevated in some other services but has declined sharply in manufacturing and goods prices.

As outlined in the Bank of Canada’s Monetary Policy Report, inflation is expected to ease further in the months ahead. It may bump up later in the year as base-year effects unwind, and there is a risk that the upward forces on inflation could be more potent than expected. At the same time, with inflation getting closer to the target, the central bank must increasingly guard against the risk that the economy is too weak and inflation falls too much. Judging from comments made at today’s press conference, the BoC is at least as concerned about too much disinflation–taking the economy into a deflationary spiral.

Macklem said, “We are determined to bring inflation down to the 2% target and keep it there. We care as much about inflation being below the target as we do about it being above it. The economy functions well when inflation is around 2%.”

With continued easing in broad inflationary pressures, the Governing Council reduced the policy interest rate by 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. The 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.”

Bottom Line

Monetary policy remains restrictive, as the chart above shows. While the target overnight rate is now 4.25%, core inflation is only roughly 2.4%. Real interest rates remain too high for the economy to reach its potential growth pace of about 2.5%. Weaker growth implies a continued rise in unemployment and excess supply in other sectors.

In separate news, the US released data showing that US job openings fell to their lowest level since January 2021, consistent with other signs of slowing demand for workers.

US job growth has been slowing, unemployment is rising, and job seekers are having greater difficulty finding work, fueling fears about a potential recession.

Federal Reserve policymakers have made it clear they don’t want to see further cooling in the labour market and are widely expected to start lowering interest rates at their next meeting in two weeks.

In other news, consistent with a global economic slowdown, oil prices have plunged to new 2024 lows. Weak oil prices are a harbinger of lower inflation, growth and mortgage rates.

Bonds rallied in the wake of the disappointing US data, taking the 5-year government of Canada bond yield down to a mere 2.89%, well below the 3.4% level posted when the Bank of Canada began cutting interest rates in June. This decline in market-driven interest rates reduces fixed-rate mortgage yields. Moreover, today’s cut in the overnight rate will be followed soon by a 25 basis point reduction in the prime rate to 6.45%, reducing floating rate mortgage yields as well.

The Bank of Canada has two more decision dates this year: October 23 and December 11. At those meetings, the Bank is widely expected to continue its quarter-point rate cuts, taking the overnight rate down to 4.0% at yearend and 2.75% next year.

Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Image Credit: Jason Hafso Unsplash

As a mortgage consultant, I simplify the financing process by finding the best loan options for you.  Whether buying a new home, refinancing or exploring equity lines and reverse mortgages, I work with various lenders to meet your needs.  From managing renewals to consolidating debt and securing loans for personal and investment properties, I’m here to make your mortgage journey smooth and efficient.

Here are some of the ways I can help:

Securing Loans for Buying a Home, Rental Property, or Second Home: Assisting with obtaining loans for purchasing your main home, rental properties, or second homes.

Renewing Mortgages: Helping with renewing your mortgage at the end of each term, evaluating options, negotiating better rates and terms, and ensuring a smooth transition to a new mortgage. Assisting with switching lenders if needed to achieve better rates and terms.

Refinancing Your Mortgage: Guiding you through obtaining a new mortgage to replace an old one, potentially securing better rates, lowering payments, or accessing extra funds for renovations, emergency expenses, or helping others buy property.

Obtaining Home Equity Lines of Credit (HELOCs): Providing assistance in securing a flexible line of credit based on your home’s equity for various needs.

Accessing Reverse Mortgages: Helping seniors tap into their home’s value with reverse mortgages, allowing them to stay in their homes while obtaining additional funds.

Financing Construction Loans: Assisting with obtaining financing for building a new home or major property renovations.

Bridge Loans: Providing short-term loans to cover the gap between buying a new home and selling an old one.

Consolidating Debt: Helping combine existing debts into your mortgage to simplify payments and potentially reduce interest rates.

Whether you’re planning to buy a new home, refinance an existing mortgage, or explore other financing options, I’m here to assist.  The mortgage process involves many steps, but with the right guidance, it can be straightforward.  If you have any questions or need assistance with your mortgage needs, don’t hesitate to reach out.  I’m committed to providing clear and effective solutions to help you achieve your financial goals.  Let’s connect and I look forward to seeing how I might best help you.

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Inflation in Canada decelerated once again in July to its slowest pace in three years, assuring the central bank will cut rates for the third consecutive meeting on September 4. The US is also widely expected to begin easing monetary policy at its September confab.

The annual inflation rate in Canada fell to 2.5% in July from 2.7% in June, matching market expectations. The deceleration in headline inflation was broad-based, stemming from lower prices for travel tours, passenger vehicles and electricity. This confirmed the Bank of Canada’s expectation that inflation would fall to 2.5% in the second half of this year.

The CPI rose 0.4% in July after falling 0.1% in June. Gasoline prices increased month over month in July (+2.4%), putting upward pressure on the monthly CPI figure. The CPI rose 0.3% in July on a seasonally adjusted monthly basis.

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 trimmed edged down to 2.7% last month from 2.9% in June. The CPI median fell two ticks to 2.4%.

The central bank’s two core inflation measures decreased, averaging a 2.55% yearly pace, from a downwardly revised 2.7% a month earlier. 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. The 3- and 6-month moving averages fell in July, with the 6-month figure just above the central bank’s target of 2%.

Bottom Line

This week’s inflation reading is good news for the Bank of Canada, giving them leeway to cut interest rates next week. July marks the seventh 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.

This week’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 September 4 by 25 bps to 4.25%.

In July, mortgage interest costs and rent remained the most significant contributors to the annual inflation rate change. Mortgage interest costs were up 21% in July compared with 22.3% in June, while rents rose 8.5% compared with 8.8%. Excluding shelter costs, the consumer price index rose 1.2% from a year ago versus 1.3% in June.

Labour markets have eased since the Bank’s last decision date. Canada shed 2,800 jobs in July, and the unemployment rate was steady at 6.4%, its highest level in over two years. Bank officials have expressed their concern that a further decline in the job market may delay a recovery in household spending, putting downward pressure on growth.

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

Image Credit: Ryan (no last name) Unsplash

With the next Bank of Canada decision approaching, some borrowers question whether to wait for a potential drop in the prime rate before evaluating their mortgage renewal options.  Similarly, those buying properties might also contemplate if they should delay their decision on which rate type to select.  While thinking that a lower prime rate will automatically lead to better mortgage offers may seem intuitive, the reality is more complex.

The Key to Variable Rate Pricing: The Variable Rate Discount

Variable rate mortgage rates are comprised of two main factors: the prime rate, and the discount the lender offers off that rate.  The variable rate discount is the pricing component that determines how much less you’ll pay compared to the prime rate.

If a lender offers a 5-year variable mortgage with a discount of -0.70% off the prime rate (currently 6.7%), the effective rate would be 6.0%.  This discount remains constant throughout the 5-year term of the mortgage, so the rate will always “float” at 0.70% below whatever the prime rate is.

Lenders Can Change Variable Discount Offers At Any Time

If a given lender has too many fixed-rate mortgages on their books they may deepen variable discounts to attract more borrowers to take variable rates, and vice versa.  And in stable markets, banks may offer deeper discounts as well.

Fixed Rates and the Variable Rate Discount: Independent of Prime Movements

Both fixed rates and variable rate discounts are influenced by lenders’ cost of funds, credit risk, competition, housing and financial markets, and broader economic conditions.  Just as the variable rate discount is not directly tied to prime rate movements, neither are fixed mortgage rates.  Though both may trend in the same direction as the prime rate over time, a variety of factors are at play, which may or may not coincide with changes in the prime rate.

Bottom Line

Bank of Canada rate decisions do influence fixed and variable rate pricing, but not typically in a synchronized way. Rather than trying to time decision-making with Bank of Canada announcements, there’s likely more value in making rate decisions by evaluating current options and forecasted trends as they align with your financial goals.  Please reach out at any time should you wish to discuss your mortgage, I am always happy to help.

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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.

Mortgage renewal time provides many opportunities to save and align your mortgage terms with your short and long-term plans.  Leaving yourself enough time is essential to make the most of the options to give yourself the most flexibility possible, and to grow your net worth.

Opportunities at Renewal Time

You have many options available to you without paying a penalty at the end of your term at renewal time, options which are not always readily apparent.

• Better Interest Rates and Terms: As your mortgage consultant, I shop across banks, trust companies, credit unions, and other mortgage lenders to compare rates and terms with what your lender offers at renewal.
• Switch To Fixed or Variable: Consider switching from a fixed-rate to a variable-rate mortgage, or vice versa, based on market conditions and your financial plans.
• Add a Home Equity Line of Credit: Give yourself the flexibility of accessing some of your home’s equity to renovate, invest in other property, or cover other expenses now or in the future. If you’re getting close to the end of your career, this is an important step in planning for retirement and time is of the essence to qualify before reducing your income from employment.
• Adjust Mortgage Terms: Modify the term length of your mortgage to suit your financial plans taking rate forecasts into account
• Increase Prepayment Privileges: If paying off your mortgage faster is important. switch to a lender offering higher prepayment privileges without penalties.
• Increase Your Amortization: Lower your monthly payment by increasing the amortization on your mortgage. If cash flow is a concern, or if you’d like to invest at a higher rate of return than you’re paying on your mortgage, increasing your amortization might best suit your plans for the time being.
• Consolidate Debt: Use the renewal time to consolidate other debts into your mortgage for lower interest rates than you’re paying currently.
• Access Equity: Take advantage of your home’s increased equity for renovations, to invest in other property, or other financial needs by increasing your mortgage, or adding a Home Equity Line of Credit (HELOC).   If you’re getting close to the end of your career, adding a HELOC is an important step in planning for retirement.  Time is of the essence to qualify before reducing your income from employment.
• Consider a Reverse Mortgage: Would converting to a reverse mortgage relieve financial pressure? If you’re 55 or over, you may be able to convert your existing mortgage, stop making mortgage payments, and cover other financial needs.  The property remains in your name and you can still leave your property to your children or others.  Property taxes can typically be deferred too.

Benefits of Starting Early

• Maximize Savings: Early engagement allows a thorough comparison of current mortgage rates and terms available to you.
• Optimal Transfer Window: Transferring your mortgage to another lender after your renewal date is possible. However, your lender will likely charge you higher interest for each day of delay past the renewal date, and interest can add up.  Transferring as close to your renewal date will save you the most money.  In some cases, transfer costs can be covered by the new lender and transferring on time will ensure you maximize your renewal time savings opportunities.
• Avoid Last-Minute Stress: Starting early prevents rushed decisions and ensures a smoother transition, properly aligned with your short and long-term financial opportunities.

Discussing with me ahead of time will help set you on track to make an informed choice.  Anticipate your options in advance to secure the best value available.  Contact me any time to plan for your next renewal.  I am always happy to help.

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The Canadian Real Estate Association (CREA) announced today that national home sales fell 0.6% in May, remaining slightly below the average of the past ten years. Actual (not seasonally adjusted) monthly activity was 5.9% below May 2023.

With the Bank of Canada rate cut on June 5, housing activity will likely perk up in the coming months. The central bank will likely reduce the overnight policy rate from 4.75% to 3.0% by the end of next year. While interest rates will remain above pre-pandemic levels, there is pent-up demand for housing, and activity will surely rise over the next year.

New Listings

The number of newly listed homes was up in May, though only by 0.5% monthly. Slower sales amid more new listings this year have increased the number of homes for sale across most Canadian housing markets.

As of the end of May 2024, about 175,000 properties were listed for sale on all Canadian MLS® Systems, up 28.4% from a year earlier but still below historical averages.

“The spring housing market usually starts before all the snow has melted, somewhere around the beginning of April, but this year I believe a lot of people were waiting for the Bank of Canada to wave the green flag,” said James Mabey, Chair of CREA. “That first rate cut is expected to bring some pent-up demand back into the market, and those buyers will find there are more homes to choose from right now than at any other point in almost five years.”

With sales down slightly and new listings up slightly in May, the national sales-to-new listings ratio eased to 52.6% compared to 53.3% in April. The long-term average for the national sales-to-new listings ratio is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions. There were 4.4 months of inventory on a national basis at the end of May 2024, up from 4.2 months at the end of April and, looking past the volatility at the onset of the COVID-19 pandemic, the highest level for this measure since the fall of 2019. The long-term average is about five months of inventory.

Home Prices

The National Composite MLS® Home Price Index (HPI) dipped 0.2% from April to May.

Regionally, prices are generally sliding sideways across most of the country. The exceptions remain Calgary, Edmonton, and Saskatoon, where prices have steadily ticked higher since the beginning of last year.

The non-seasonally adjusted National Composite MLS® HPI stood 2.4% below May 2023. This mostly reflects the price surge that started last April and hasn’t been repeated in 2024.

Bottom Line

Housing activity will gradually accelerate over the next year as interest rates continue to fall. The Bank of Canada was the first major central bank to ease monetary policy. While there has been some concern regarding the impact on the Canadian dollar of repeated easing by the Bank with the US Federal Reserve on hold, the divergence may be smaller than expected. Recent US inflation data showed a meaningful improvement, suggesting the Fed could cut rates two times before the end of the year. Moreover, movements in the loonie have little near-term impact on inflation.

The Canadian economy is far more interest-sensitive than the US, and the relative underperformance of our economy is the largest since 1965. Further rate cuts by the Bank of Canada are warranted.

Dr. Sherry Cooper

Image Credit: Rose Butler, Unsplash