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Bank of Canada raises 0.25% – July 2023
/in Misc. /by adminGood morning,
The Bank of Canada raised rates 0.25% at this mornings rate announcement. This is the second consecutive increase after the 5 month pause to start the year. With inflation continuing to ease, the downward path has come more from lower than expected energy prices & less from underlying inflation, with core inflation (when you take out fuel & food) remaining persistent in the 3.5-4% range.
It was this point last year where inflation began to decelerate which will make the 2nd half of this year interesting as we will be facing easing comps from 2022. The Bank expects inflation to settle to 3% for the next year before gradually declining to 2% in the middle of 2025.
GDP growth is essentially unchanged however expectations for growth has gone up slightly, due to surging population growth. Canada’s population grew by 1.2 MILLION in the past year as of Q2. I know this comes up a lot but it’s a staggering number.
As per the Fraser Institute, Canada’s per person GDP is growing at the slowest rate since the 1930s & the Great Depression. This isn’t healthy, productivity driven growth. On the individual level we continue to be worse off.
Unemployment has risen to the highest level since February 2022. Business outlook has fallen to the weakest since the depth of the pandemic, but the Bank sees consumer price gains held up by high government spending & strong demand.
The question today is, with inflation continuing to come down, with unemployment rising, with GDP negative on a per Canadian basis, why have we now seen 2 hikes since the pause? Mortgage interest costs are adding nearly a single percentage point to CPI.
The Bank of Canada cannot control immigration. They can’t build homes & know that rates at these levels hurt housing supply as developers pull projects & sellers hold off in order to hang onto their lower mortgage rates.
The Bank of Canada raising rates today is a commitment to crushing the economy & demand. Considering the heavy handed approach we saw when the pandemic hit, urgently dropping rates to basically zero, then the extraordinary move of keeping rates unchanged as inflation marched well beyond their 2% target as their intention was to “let it run hot,” & now the extreme level of rate hikes & unusual move to go back to raising after pausing, can you really envision a scenario where this ends well?
We know where this is going, everyone knows how much their spending has changed over the last year & a half. The painful uncertainty is when we will get there & where will rates be when we get there.
Leading into this meeting, CIBC economist Andrew Grantham said in a recent report they think today’s hike will prove the peak & with rates starting to cut around the middle of 2024.
So, what should you do? If you’re in a fixed rate mortgage, raise your payments. Start preparing for higher rates at renewal & paying down more principal to lessen that potential blow waiting down the road.
If you’re in a variable rate, you can lock in to a rate that’s going to be about the same as what you’re in now, if not moderately better, but doing that takes on a significantly higher penalty risk if you break your mortgage early, takes away the ability to benefit when rates do eventually drop & only really pays off if we continue to get more hikes & rates don’t come down.
If you’re in a fixed payment variable, know that locking in will raise your monthly payments as your amortization will have to get back on track. If cash flow is the concern, you’re best off raising payments by enough so that you’re continuing to pay off some principal then reevaluating when the rate cycle turns. At renewal, assuming you have the minimum 20% equity & qualify, you can always refinance up to 30 years to lessen payment shock if rates are still elevated but if you are able to stomach higher payments you will thank yourself down the road by raising by as much as you can handle now.
Make no mistake, you can’t have the level of debt we have as a country, raise rates by this level, and squeak out a soft landing & avoid recession. Rate hike cycles end in recession.
If you would like to discuss any of this please get in touch with me today.
Bank of Canada Rate Announcement – June 2023 – 0.25% INCREASE
/in Misc. /by adminThe Bank of Canada raised rates 0.25% at this mornings rate announcement. This move was a bit of a surprises as, while a potential hike was being floated, markets weren’t favouring an increase at this meeting. This continues to be a difficult central bank to predict as if you recall, following the last hike in January they indicated their intention was to pause & wait to see how the impact of rates played out & data unfolded. Something changed over the last month so let’s take a look at what happened & what prompted this big reversal.
First off, inflation. Instead of headline inflation dropping from the March 4.3% to the expected 4.1% in April, it went up slightly to 4.4%. A 0.1% increase obviously isn’t much of a difference but it’s all about expectations & the rate of change, but it’s worth noting that was the first increase in 10 months.
It’s interesting to note that the Bank didn’t really change it’s outlook for CPI. Same as the last meeting, the expectation was for us to fall to 3% this summer. Was inflation the reason they raised this morning? Seems a little thin. So what else happened?
On the GDP front, Canada grew by 3.1% annualized in Q1 but basically all of that growth happened in January with 0.5% growth. February came in at 0.1% & March 0%.
Consumption & demand for services are the points of strength but like we’ve talked about before, when you’re bringing in record numbers of new Canadians each year that is going to support those areas. If you look at GDP on a per capita basis which is a closer reflection of the reality Canadians are facing, we’re in a recession now.
On the housing front prices have been going up but not because this is a healthy & balanced growing economy. House prices have been increasing because we’re still dealing with extraordinary low levels of inventory. Limit the supply of something & prices go up. Demand needs to fall in turn to extraordinary low levels. How will we get there with all the new bodies coming in needing places to live?
In the Bank’s financial system review it noted approx 1/3 of mortgages have seen increases in their payments compared to Feb 2022. Considering only 30% of Canadians have some form of housing loan, we can assume only 10% of Canadians have seen a mortgage payment increase & explains a little bit why this massive move up in rates hasn’t had the impact (yet) many would have predicted at the start.
Make no mistake, the Bank of Canada wants the economy to break. The move today was worrisome as this could very well open up the door to more increases over the summer. On the one hand, more increases would bring us closer to the eventual points of rates going down, but on the other hand the question is how long will it take to get there & what is going to happen in the meantime.
If you’re in a variable rate mortgage, and not necessarily wanting to lock in to your remaining term with your lender but wanting to secure a shorter term fixed for the next 4 months to see what the coming Bank of Canada meetings brings, get in touch with me today as we can still get 2 year rates in the low 5% range but would need to lock that in ASAP before taken off the table.
If you would like to discuss any of this please get in touch with me today.
Bank of Canada Rate Announcement – April 2023 – NO CHANGE
/in Misc. /by adminGood morning,
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.
The New First Home Savings Account (FHSA)
/in Misc. /by adminBank of Canada Update March – No Change
/in Misc. /by adminFor the first time in 12 months the Bank of Canada has NOT raised rates. They signalled a pause after the Jan meeting & held true today but it’s continued to be a really flippy floppy few months. Leading into Christmas bond yields were dropping & fixed rates were coming down. That reversed hard into the new year then returned to dropping below pre-Christmas levels. Enter Feb & another about face with upward pressure on rates & that’s where we still sit today.
Over that time the market went from pricing in no more hikes with rates to start dropping late 2023 to then pricing in a potential hike before the fall with the Bank of Canada not dropping until 2024.
Part of the reason for the spike was job gains. Canada added 150k jobs in Jan which was 10 times the estimate, however that was driven by temporary, non permanent resident, non citizen workers to fill the large gap of job vacancies. The interpretation there is that is likely a 1 time boom & not something to read in to deeply on. It’s also important to note that when the economy slows, those temporary workers tend to go back to their home countries so not the best foundation for a robust growing economy.
So Tiff has signalled a pause. What is the risk that could cause them to raise again? Inflation & the US FED.
On the inflation front, the good news there it came in softer than expected at 5.9% vs 6.1% expected & down from 6.3% in Dec. Food prices are still high at 10.4% year over year but who really eats food anyways..
Takeaways from today are that things are taking longer to play out. Still a lot of volatility with rates & the outlook continues to bounce around. At this point it’s looking like for the Bank of Canada to cut this year we would need a significant economic downturn but as of now it’s looking like no rate cuts until next year.
If you have a mortgage coming up for renewal this year get in touch with me today. It never hurts to get some rate holds in & have some irons in the fire as we see how the upcoming months play out.
That’s it for me. Thanks for watching & have a great day!
Bank of Canada Raises 0.25% – January 2023
/in Misc. /by adminGood morning,
2023 starts off where it left off – the Bank of Canada raised interest rates this morning for the 8th consecutive meeting. The good news is it was only 0.25%. The pace has officially slowed. The next step is to pause. Then to drop – a ways away but this is a step in the right direction.
The wording to key on in this morning’s release was that if economic developments evolve in line with expectations they expect to “hold the policy rate at it’s current level.” That doesn’t mean this WILL BE the last hike. It means it COULD be the last hike. Taking that in & piling into risk assets is a great way to make sure this is NOT the last hike.
THE mistake just about everyone made last year, myself included, was underestimating central bank action. Rates were kept so low for so long that no one really believed we would see the about face & aggressive rate hikes that we ended up seeing. The reason being that it was obvious that would cause a world of economic pain & it most certainly is. The mistake was not recognizing that became the intention. That became the justification TO raise, not the reason NOT to.
Remember, the only tool the Bank of Canada has to bring down inflation is crushing the economy. They can’t create more goods. They can’t change government spending. They can, however, make borrowing so expensive that it results in people selling assets & cutting spending to kill demand. They want & need a recession. They want job losses. It just take time for the impact of raising to be felt throughout the economy & we are now into that point.
While 1 & 2 year fixed rates are still very high, 3, 4 & 5 year fixed rates have come down significantly in the last month. 5 year fixed rates are now in the mid 4% range & the trend, right now, is for rates heading in the right direction.
I’ve been getting a lot of questions on whether clients should be paying down their mortgages right now. If you’re in a variable rate, yes you 100% should as you get a guaranteed return & save on interest as soon as you make that extra payment.
If you’re in a fixed rate, though, & your rate is well under 4%, instead of paying down your mortgage, dump that cash into GICs. You can still get GIC rates of 5% or higher from places like EQ BANK so if that is higher than your mortgage rate, you can profit by continuing to borrow at your lower mortgage rate & earning a guaranteed return over 5%. Just make sure you aren’t locking in that investment beyond your mortgage term so that you have the option of paying down your mortgage prior to renewal if mortgage rates are still elevated at that time. If you have 8 months until mortgage renewal, don’t go into a 12 month GIC.
There are a lot of mortgage renewals coming in Canada this year & the vast majority of the industry does not understand some of the tricks on how to get better pricing on mortgage renewals. Please, if you have friends or family who have mortgages coming up for renewal, put them in touch with me. I won’t waste anyone’s time. I very often will help clients even if it means not working with me, but in a lot of cases we’re saving significant amounts by knowing how to structure the renewal properly. Give that gift to the people in your life this applies to & please put us in touch.
TAKEAWAYS