The Bank of Canada’s larger-than-normal interest rate cut last month has a lot of market watchers looking for more of the same.  Most of the well-known economists are forecasting another 50 basis point cut at the setting in December.

That would drop the central bank’s trend setting Policy Rate to 3.25%, which many analysts see as the high end of the so-called neutral range for the rate.

Neutral rates are deemed to neither discourage nor encourage economic growth.  Right now, that range is commonly considered to run between 2.25% and 3.25%.

There are, however, some analysts who see the BoC dropping its Policy Rate to 2.0%, or less, by the middle of next year.  They see some lingering, troubling signals coming from the economy:

High hopes for a big, 50 basis point, rate cut by the Bank of Canada later this month have dimmed.  A strong jobs report for September has several analysts pulling back their forecasts.  They are now saying a, more traditional, 25 basis point cut is most likely.

Statistics Canada’s September employment report shows the economy added 42,000, net, new jobs, including 112,000 new full-time positions.  The unemployment rate ticked down one notch to 6.5% from 6.6% in August.

Those figures are being used to support the argument that the central bank’s current policy of quarter-point cuts is working and there is no need to change.

However, economists are also looking at other aspects of the report that, they say, temper the good news.  Those factors suggest September is an anomaly, given previous reports that show a job market that is not keeping pace with immigration.

They point out that the number of people who are working, or looking for work, dipped for the third time in four months; total hours worked declined and hourly wage growth slowed.  All of these indicate some weakness in the economy that could justify a half-percent cut in the Bank of Canada policy rate.

Given the mixed nature of the jobs report, most economists agree that the up-coming inflation report, which is due before the next rate setting, will likely be the key factor in any decision.

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Conditions seem ripe for a big, 50-point, interest rate cut by the Bank of Canada at its next setting later this month.  But the federal banking regulator has confirmed it will be providing, more direct, mortgage relief.

The Office of the Superintendent of Financial Institutions (OSFI) says it is going to end the stress test for uninsured mortgage switches.  The formal announcement is set for November 21.

The stress test, which was introduced at the beginning of 2018, requires borrowers with uninsured mortgages (i.e., a down payment of 20% or more) to qualify for their loan at the Bank of Canada’s five-year benchmark rate or their mortgage rate plus 2%, whichever is higher.

The upcoming change means borrowers who are making a straight swap of their existing mortgage from one lender to another – keeping the same loan amount and amortization schedule – will not have to requalify and pass the stress test.

Removing the stress test requirement answers a long-standing complaint that it discouraged – even prevented – borrowers from shopping for a new, cheaper lender at renewal time.  OSFI says it is making the change based on feedback from the mortgage industry and Canadians.

In March the federal Competition Bureau recommended dropping the stress test, saying the policy was “not evenly applied.”  OSFI all but admits the policy was wrong, saying the risks it had been intended to address “have not significantly materialized.”

Canada’s latest employment numbers are widely seen as supporting more interest rate cuts by the Bank of Canada.

The economy shed 1,400 jobs in June and the unemployment rate rose to 6.4%, up 0.2% from May.  The loss of about 3,000 full-time jobs was somewhat offset by the addition of about 2,000 part-time positions.  Economists are saying the numbers give the BoC more latitude to move ahead with interest rate reductions.

The prospect of lower rates is, of course, appealing to anyone looking to get or renew a mortgage, but reduced interest costs are not likely to improve affordability.

Economist Marc Desormeaux recently ran simulations looking at the impact of some commonly proposed solutions to Canada’s housing affordability problem, including lower interest rates.  He found that the decline in interest rates is expected to be moderate in the short term, which will make mortgage payment relief minimal and likely to be offset by increasing housing prices.  He also notes that income growth is expected to be modest making the likelihood of improved affordability only moderate, if at all.

Desormeaux also looked at extended amortizations, limiting immigration, a spike in new listings, and recession.  All of the scenarios were seen to be minimally effective, and only in the short term.

“Increasing housing supply is the only sustainable long-run solution”, says Desormeaux in his report.

Published by First National Financial LP