The Bank of Canada has held its trendsetting interest rate at 5.0% for a third straight setting and talk of further increases has been all but silenced.

In the statement that came with the most recent rate announcement, The Bank offered a number of reasons for the decision to hold steady:

• higher rates are “clearly restraining spending”
• the economy “is no longer in excess demand”
• the general economic slowdown is reducing inflationary pressures

Even though The Bank said it will hike again, if necessary, most market watchers are looking into their crystal balls trying to predict when, and by how much, The Bank will be cutting rates.

The general consensus right now is for a quarter point (25 basis point) cut in April.  There are some who expect to see it a little earlier, in March.  Others say it’ll be June.

The projections for overall cuts in 2024 range between 1 and 2 full percentage points.

The Bank of Canada still has some inflation concerns, in particular, core inflation which continues to run in the 3.5% to 4.0% range.

Headline inflation, also known as the Consumer Price Index, is 3.1%; tantalizingly close to The Bank’s 1.0% to 3.0% target range.

The Bank will also be keeping a close watch on the job market.

The next interest rate announcement is set for January 24, 2024.

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Two key guide posts for the Canadian economy are pointing in the same direction.  Both the third quarter GDP numbers and November jobs figures suggest the Bank of Canada is unlikely to make any changes to its trendsetting interest rate in the coming days.

Canada’s economy shrank at an annualized rate of 1.1% through July, August and September.  That was a bigger decline than expected.  Market watchers had been looking for a modest 0.2% increase.  The Bank of Canada had forecast a 0.8% gain.  The country avoided falling into a technical recession though, because the Q2 reading was revised upwards to a 1.4% gain.  It had initially been posted as a 0.2% decline.  Nonetheless the economy has been on a slowing trend for several months.

The economy added more jobs than expected in November, but the unemployment rate went up.  There were nearly 25,000 jobs added, beating the forecast of 15,000.  However, that did not keep up with the country’s population growth.  Unemployment rose to 5.8%, from 5.7% in October, because there are more people looking for work.

These are the last two major economic data points before the Bank of Canada makes its December rate announcement this week.  When combined with the latest inflation numbers (up 3.1% y/y in October) the Bank appears to have all the reasons it needs to hold its policy rate at 5.0%.  That rate has not moved since July and the market focus has now shifted away from further increases and toward when there could be cuts.

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There has been a little relief for mortgage shoppers in recent days.  Fixed-rates have come down slightly, led by declining yields for government bonds.  Variable-rate mortgages appear to be maintaining their discounts and most market watchers believe the Bank of Canada has reached the top of this rate-hiking cycle.

The Bank, however, continues to warn that Canadians should be preparing for interest rates to remain higher for longer.  Senior Deputy Governor Carolyn Rogers made that point again during a recent speech in Vancouver, saying it is important to adjust proactively to that possibility.  Rogers cited a number of global considerations for higher rates including: China and other developing nations joining the worldwide economy; a decline in attractive investment opportunities for businesses; and an overall, international, adjustment to higher rates.

It is also useful to remember that central banks around the world have been working to normalize interest rates that have been at historic lows since the 2008 financial crisis.

Rogers offered some reassurance that Canadians are adjusting to higher rates.  Household credit growth has dropped to its slowest pace since the early ’90s.  Delinquency rates on credit cards and other consumer loans are only slightly above pre-pandemic levels.  Mortgage delinquencies are below pre-pandemic levels, and that is despite about 40% of all mortgage holders having already renewed at higher rates, with bigger payments.

As to when interest rates might actually start falling?  The BoC’s Q3 survey of “Market Participants” suggests they are adjusting to the higher-for-longer scenario. Based on the median response they are expecting a quarter point drop in April, 2024.  That is a month later than expectations expressed in the Bank’s Q2 survey.

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An interesting difference of opinion has developed between the economists and the people who deal in the bond markets.  The economists do not expect to see any rate cuts by the Bank of Canada until the middle of next year.  But the markets see things changing sooner.  And there may be benefits for mortgage shoppers.

The Bank of Canada has been trying to wrestle inflation back to its 2.0% target by raising interest rates to slow the economy.  There have been 10 hikes since March of 2022 and they appear to be delivering the desired results.  Inflation is down.  Household spending is down.  Employment is down and GDP growth is down.  For two settings in a row, the Bank of Canada has held its trendsetting rate at 5.0% and there is little indication that any further increases are coming.

Even though the BoC does not expect to see inflation back at 2.0% until mid-2025, some recent comments by the Bank’s bosses have the bond markets looking for rate cuts.  Both Governor Tiff Macklem, and Deputy Governor Carolyn Rogers, told the federal finance committee cuts could start before the 2.0% target is hit.

Since then, yields on 5-year, Government of Canada bonds — which are the basis of fixed-rate mortgage interest — have dropped more than 30 basis points (0.3%) to 3.79%.  Yields are down more than 60 bps (0.6%) from highs reached in early October.  That has some market watchers forecasting declines in fixed mortgage rates of 20 to 40 bps over the very near term.

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An interesting new survey suggests a growing number of Canadians may be getting ready to move back into the housing market.

The newly launched survey by Dye and Durham indicates one in ten are looking to sell their primary residence and move into a new one within the next 12 months; double the number who made the move in the past year.

The number of respondents planning to expand their holdings is also up significantly with 8.0% saying they intend to buy an investment property or vacation home in the next year.  That is nearly double the 5.0% who did so in the past year.  First-time buying decisions are also getting stronger.  Eight percent of respondents expect to jump into the market, up from 4.0% who actually made a purchase in the last 12 months.

The sidelines of the housing market will still be crowded though.  The survey suggests 23% of Canadians will bide their time until interest rates come down.  Nearly a quarter (24%) say they are waiting for prices to ease.

A separate survey of people who have bought a home in the last 4 years (by a popular real estate marketplace) shows that the buying decisions of 93% of respondents were influenced by rising interest rates and competitive markets.  At the same time 43% said they wanted to buy before prices increased further.

Nearly a third (30%) of the respondents say their finances are tight right now, with 10% saying they are unable to meet basic needs.  Still, they do not regret their purchase with 45% saying they will still be happy even if there is another interest rate increase this year.

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The latest reading on Canada’s economy has triggered a quick turnaround in expectations about the Bank of Canada’s course on interest rates.

The latest reading by Statistics Canada shows economic growth slowed markedly in the second quarter.  Gross Domestic Product – which is the total value of all goods and services produced in the economy – contracted by 0.2% in the April to June period.  Forecasters had been calling for a 1.2% increase.  The Bank of Canada had been projecting a 1.5% increase.

StatsCan also downgraded its Q1 growth rate from 3.1% to 2.6%.  Early estimates for July show the month coming in flat.

The report adds to the evidence that the Bank of Canada’s high interest rate policy is having its intended effect.  StatsCan’s latest, monthly jobs report showed the unemployment rate increased to 5.5% in July.

Two key factors led the decline in GDP.  Household spending, which has been a prime target of the interest rate policy, grew by just 0.1% compared with a 2.5% increase in the first quarter.

Housing also saw significant declines.  Investment was down 2.1% quarter-over-quarter.  New construction fell 8.2%.

Most market watchers now believe the Bank of Canada will step to the sidelines for the rest of the year.  Just last month, many analysts were calling for one more quarter-point increase before the end of 2023.  The Bank’s current policy rate is 5.0%.

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New reports on a number of the key components that feed into the Bank of Canada’s interest rate decisions are out this week.  The one that will be getting the most attention is the inflation reading for July.

It is expected there will be a small up-tick in the Consumer Price Index – or headline inflation – from 2.8% to 2.9%.  Analysts point to rising energy costs as the main reason for the increase.  However, that rate does remain inside the Bank’s 1.0% to 3.0% target range.

Food price increases will also contribute, but they are expected to moderate as commodity prices decline and supply chains continue to improve.

Of course, the central bank will be paying closer attention to core inflation which has been frustratingly “sticky”.  The increase in core inflation (which excludes volatile items like food and fuel) are expected to slow from 3.5% to 3.0%.  Some of that decline is due to the big increase that hit in April no longer being part of the three-month rolling average.

Mortgage interest costs continue to account for a disproportionate amount of CPI growth (almost a third of total growth).  But the BoC will likely look past that component since it is a direct result of higher interest rates.

The July home sales and housing starts are also due out this week.

The Bank of Canada’s next rate announcement is set for September 6.

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One of the closely watched components in the Bank of Canada’s interest rate setting process missed growth expectations, but was still up on a month-over-month basis.

The country’s Gross Domestic Product rose by 0.3% in May, less than the 0.4% that had been forecast, but up from 0.1% in April.  (April’s growth rate was revised upward from flat.)

Initial estimates for June suggest GDP, which is the total value of all goods and services produced by the economy, will actually shrink by 0.2%.  If that happens economic growth for the second quarter will come in at around 1.2%, down from 3.4% in the first quarter.  It would also be below the Bank of Canada’s 1.5% forecast.

Those numbers appear to be what the central bank has been trying to achieve with its inflation-fighting interest rate policy.  Several prominent economists are now predicting that the Bank will not be raising its trend-setting Policy Rate at its next setting in September.

There is not a consensus on that forecast though.  A number of market watchers point to transitory shocks that have temporarily slowed the economy in recent months including: the federal public service strike, the B.C. ports strike and the wildfires across the country.

Many of them also point out that the labour market remains tight and wage gains are running in the 4.0% – 5.0% range.  As well, core inflation remains stubbornly sticky, holding in the 3.5% area.

The Bank of Canada rate currently stands at 5.0%.  The next rate announcement is set for September 6^th.

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