The Bank of Canada left rates unchanged with this morning’s rate announcement, as was expected. They signalled they intend to pause & see how the economy responds to the jumbo hikes from last year so nothing has really tipped the scales in either direction for them to make a move.
That said, it’s been an eventful month. Much of the upward rate pressure has been the extremely hawkish talk from the US Fed – the higher they go, the more pressure there is for Canada to raise to support our currency.
Just over a month ago bond yields started to drop significantly as the stability of the US banking sector came into question. The 16th largest bank in the US – Silicon Valley Bank – failed as their bond holdings were basically underwater & worth significantly less than what they paid for them. The mechanics behind that is when rates go up, bond values go down so all the rate hikes lead to a run on deposits, money getting pulled out as there were concerns about the bank having enough assets to pay them out & voila, the bank was shut down.
They weren’t the only one mind you & there was concern for the regional banking sector overall. The talk was that further rate increases would make this issue worse & could lead to a full blown crisis but that has since died down. The Fed raised 0.25% at their last meeting (0.5% was being floated around) & changed their guidance from being committed to “ongoing” rate hikes to “some additional hikes.. maybe.” Basically, they may raise. They may not, but overall they are easing off the brakes a bit. All in all it was a step in the right direction if you’re looking for rates to come down here.
In Canada, employment data continues to be strong & surprised to the upside, although, again, that is one of the most lagging indicators & the last shoe to drop when the economy enters recession.
Inflation continues to ease & the Bank expects CPI to fall quickly to around 3% by mid this year & decline to 2% by the end of next year.
One of the major challenges in getting inflation down & keeping it down is our recently announced federal budget. More spending & more debt will not help ease inflation any time soon. Cutting $500 cheques to help cover soaring prices of groceries does nothing to help bring down prices. Announcing a new tax free savings account for new home buyers goes directly in opposition to what the Bank of Canada is trying achieve, although I will say, if you qualify for that program, use it & I have some highlights of the program on my website you can check out. It is a really good program but make no mistake that is stimulus to a housing market the Bank of Canada wants to cool. All signs of our budget & immigration commitment point to higher inflation for longer.
In the near term, barring a crisis, there doesn’t seem to be any indication that rates will go up or down. Bond yields continue to bounce around & at this point it’s not looking like the Bank will start dropping until 2024 but it does look like we’re going to see fixed rates continue to settle lower here.
That’s it for today. If you have a mortgage coming up for renewal this year or are looking to buy & want to run your strategy by me, please get in touch as I’d love to hear from you. Thanks & have a great day.