Persistent inflation leads the Bank of Canada to increase benchmark interest rate
UGH! The BoC whacks borrowers again.
Mark Herman, Top Calgary Alberta Mortgage Broker
Yesterday, the Bank of Canada increased its overnight interest rate to 5.00% (+0.25% from June) because of the “accumulation of evidence” that excess demand and elevated core inflation are both proving more persistent and after taking into account its “revised outlook for economic activity and inflation.”
This decision was not unexpected by analysts but is disconcerting – as is the Bank’s pledge to continue its policy of quantitative tightening.
To understand today’s decision and the Bank’s current thinking on inflation, interest rates and the economy, we highlight its latest observations below:
Inflation facts and outlook
- In Canada, Consumer Price Index (CPI) inflation eased to 3.4% in May, a “substantial and welcome drop from its peak of 8.1% last summer”
- While CPI inflation has come down largely as expected so far this year, the downward momentum has come more from lower energy prices, and less from an easing of “underlying inflation”
- With the large price increases of last year removed from the annual data, there will be less near-term “downward momentum” in CPI inflation
- Moreover, with three-month rates of core inflation running around 3.5% to 4% since last September, “underlying price pressures appear to be more persistent than anticipated”, an outcome that is reinforced by the Bank’s business surveys, which found businesses are “still increasing their prices more frequently than normal”
- Global inflation is easing, with lower energy prices and a decline in goods price inflation; however, robust demand and tight labour markets are causing persistent inflationary pressures in services
Canadian housing and economic performance
- Canada’s economy has been stronger than expected, with more momentum in demand
- Consumption growth was “surprisingly strong” at 5.8% in the first quarter
- While the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy
- The housing market has seen some pickup
- New construction and real estate listings are lagging demand, which is adding pressure to prices
- In the labour market, there are signs of more availability of workers, but conditions remain tight, and wage growth has been around 4-5%
- Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing
Global economic performance and outlook
- Economic growth has been stronger than expected, especially in the United States, where consumer and business spending has been “surprisingly” resilient
- After a surge in early 2023, China’s economic growth is softening, with slowing exports and ongoing weakness in its property sector
- Growth in the euro area is effectively stalled: while the service sector continues to grow, manufacturing is contracting
- Global financial conditions have tightened, with bond yields up in North America and Europe as major central banks signal further interest rate increases may be needed to combat inflation
- The Bank’s July Monetary Policy Report projects the global economy will grow by “around 2.8% this year and 2.4% in 2024, followed by 2.7% growth in 2025”
Summary and Outlook
As higher interest rates continue to work their way through the economy, the BoC expects economic growth to slow, averaging around 1% through the second half of 2023 and the first half of next year. This implies real GDP growth of 1.8% in 2023 and 1.2% in 2024. The Canadian economy will then move into “modest excess supply” early next year before growth picks up to 2.4% in 2025.
In its July Monetary Policy Report, the Bank noted that CPI inflation is forecast to “hover” around 3% for the next year before gradually declining to 2% in the middle of 2025. This is a slower return to target than was forecast in its January and April projections. As a result, the Bank’s Governing Council remains concerned that progress towards its 2% inflation target “could stall, jeopardizing the return to price stability.”
In terms of what Canadians can expect in the near term, the Bank had this to say: “Quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”
Stay tuned
September 6th, 2023 is the Bank’s next scheduled policy rate announcement. Will there be 1x more increase?
New-to-Canada mortgages for immigrants have been around for years!
Do you want to read some total BS-PR-spin that the banks put out? Below is a press release from a bank patting themselves on the bank for lending to new immigrants. Funny thing is that this program that they have “developed” has been around for more than 7 years. All they did was sign up for the CMHC New to Canada program that every other lender that we use has had since I started doing this in 2004! Good job ING. Way to do what every one else is doing. Many years late.
Getting a mortgage in this country may have just gotten slightly easier.
ING Direct Bank, recognizing the overwhelming desire for most Canadians, particularly with newcomers to the country, to realize the dream of home ownership is modifying its’ lending criteria.
In a release, ING Direct Bank said, “ING DIRECT, the country’s 6th largest mortgage lender, announced today it is offering its popular unmortgage to permanent and non-permanent residents with limited or no credit history. Permanent and non-permanent residents include those who have been residing in Canada for no longer than 60 months. “
ING Direct recognizes the sheer numbers and the tremendous influence that immigration plays- not just in the makeup of the Canadian population, but in the marketplace as well. As such, they are developing product to meet that need.
“At ING DIRECT, our goal has always been to give the power of saving to all Canadians, so offering our unmortgage to new residents allows us to stay true to that promise,” said Peter Aceto, President and CEO of ING DIRECT Canada. “We want to give newcomers access to the same products and savings opportunities we have been providing to Canadians for the last 14 years”
Motivated by the desire to establish a banking relationship right from day one with newcomers to this country, ING Direct jumped into action to provide a solution for people trying to establish their credit history.
Aceto says, “We have always been committed to making the mortgage experience better for our clients. For newcomers to Canada, our product is simple and easy to understand. We always provide the best rates upfront and guarantee those rates for up to 120 days after applying, and our flexible pre-payment options allow our clients to own their homes sooner by paying as little interest as possible over the life of the mortgage.”
Canada is known globally for its’ stringent lending policies- which are partly to thank for escaping the recent recession relatively unscathed.
While qualifying for a mortgage may have loosened slightly, it is likely not a sign that credit criteria is less stringent generally. Qualifying for a mortgage , while taking credit history into account, generally has some different criteria, because it is as much about the asset that is securing the debt, and the amount of cash available to pay for ongoing expenses.
TD Canada Trust releases 2011 Home Buyers Report
TORONTO (March 7, 2011) – When homebuyers browse the listings and hit the open houses this spring, will they be looking for brand-new homes that won’t need any work or fixer-uppers that they can renovate to suit their taste? According to the 2011 TD Canada Trust Home Buyers Report, Canadians are divided with men and women sitting on opposite sides of the fence.
Half of Canadians would prefer a new home because everything will work perfectly (25%) and it hasn’t been lived in before (24%), while the other half prefer older homes, which they feel offer better quality (34%) or have more character (17%). The TD Canada Trust Home Buyers Report found that men are more likely than women to prefer a fixer-upper because it is more affordable (14% versus 8%) and because they can renovate to their taste (37% versus 29%).
“If you are willing to do the renovations or upgrades, buying a home that needs some work can give you the ability to transform the space into your dream home,” says Farhaneh Haque, Regional Manager, Mobile Mortgage Specialists, TD Canada Trust. “However, if you decide to go the renovation route, it’s important to understand the costs of the upgrades you intend to make and factor those in when deciding on the price range for a home that is realistic for you.”
The most important factors in deciding what home to buy:
Whether it’s brand new or older with charm, Canadians say the most important consideration when buying a home is cost (97%). Women are more likely to say this is a very important consideration (82% versus 70% of men). Other important factors are features of the home (94%), size (93%), security and safety (92%) and location (91%).
“When house-hunting there are some factors, like the features of the home, which can be adjusted once you’ve made your purchase. Other factors, like the location, cannot be changed. Finding the right home is about getting the right balance – and at a price you can afford,” says Haque. “Canadians wisely say that that cost is the number one consideration for a home purchase, evidence that Canadians realize that in order to truly be comfortable in their home, they need to comfortably be able to afford it!”
About the Home Buyers Report:
TD Canada Trust commissioned Environics Research Group to conduct a custom online survey of Canadians who had either purchased a home within the last two years or intend to purchase one in the next two years. Between December 22 – 29, 2010, a total of 1,001 interviews were completed.