Prime now 6.95% from 7.20%: BoC reduces its benchmark interest rate to 4.75%

Today, the Bank of Canada reduced its overnight policy interest rate by 0.25% to 4.75%. This welcome and widely expected decision comes on the heels of evidence pointing to a deceleration of the rate of inflation.

SUMMARY:

The “overnight rate” being quoted is the rate that Banks borrow from each other at, not consumer Prime, which is confusing.

Canadian Consumer Prime has just been reduced from 7.20% to 6.95% – this only affects Variable Rate mortgages.

Fixed rates remain unchanged because they track the Canadian Mortgage Bond Rates which are different, and similar.

There has also been about 40 “silent” fixed rate reductions of o.o5% each in 2024 that the press did not cover.

Mortgage Mark Herman, Top best Calgary Alberta mortgage broker specializing in 1st time buyers

Below we examine the Bank’s rationale for this move by summarizing its observations below, including its all-important outlook comments that are sure to shape market expectations for the remainder of the year.

Canadian inflation

• Inflation measured by the Consumer Price Index (CPI) eased further in April to 2.7%
• The Bank’s preferred measures of core inflation also slowed and three-month indicators suggest continued downward momentum
• Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average, however, shelter price inflation remains high

Canadian economic performance and housing

• Economic growth resumed in the first quarter of 2024 after stalling in the second half of last year
• At 1.7%, first-quarter GDP growth was slower than the Bank previously forecast with weaker inventory investment dampening activity
• Consumption growth was solid at about 3%, and business investment and housing activity also increased
• Labour market data show Canadian businesses continue to hire, although employment has been growing at a slower pace than the working-age population
• Wage pressures remain but look to be moderating gradually
• Overall, recent data suggest the economy is still operating in excess supply

Global economic performance and bond yields

• The global economy grew by about 3% in the first quarter of 2024, broadly in line with the Bank’s April Monetary Policy Report projection
• The U.S. economy expanded more slowly than was expected, as weakness in exports and inventories weighed on activity
• In the euro area, activity picked up in the first quarter of 2024 while China’s economy was also stronger in the first quarter, buoyed by exports and industrial production, although domestic demand remained weak
• Inflation in most advanced economies continues to ease, although progress towards price stability is “bumpy” and is proceeding at different speeds across regions
• Oil prices have averaged close to the Bank’s assumptions, and financial conditions are little changed since April

Summary comments and outlook

The Bank cited continued evidence that underlying inflation is easing for its decision to change its policy interest rate. More specifically, it said that “monetary policy no longer needs to be as restrictive.”

Also welcome was the Bank’s statement that “recent data” have “increased our confidence that inflation will continue to move towards” its 2% target.

However, it also added this to its outlook: “Nonetheless, risks to the inflation outlook remain. Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”

And has it has been doing for some time, it said the Bank “remains resolute in its commitment to restoring price stability for Canadians.”

Next up

The Bank returns on July 24^th with its next monetary policy announcement – I think they will do another 0.25% reduction at the next meeting and they will continue to reduce at every meeting for the next 3 meetings this year.