Bank of Canada’s (BOC) rate pause decision in September was expected by most analysts as the economic data has started to support a slowdown with higher rates working their way through the economy. The BOC governor left the door open for additional rate increases, but with the recent GDP data showing the economy slowed more than expected in the first half of 2023, this may be the end of the rate hike cycle and, finally, a huge reprieve for mortgage holders.
Here’s an update to some of the core data under consideration:
This measure gives us a glimpse of the health of the economy. Current data shows that Canadian GDP slowed in the second quarter of 2023 and missed market expectations by 0.3%. On an annualized basis Canadian economy contracted by 0.20% and is currently well below the market expectations of 1.2% growth for 2023, so data is showing that economic growth has slowed. Much of this recent decline resulted from a slowdown in consumer spending, a drop in home construction and the impact of wildfires.
Source: Tradingeconomics.com | Statistics Canada
This measure gives us an idea of the % of unemployed persons in the labour force. When unemployment is too low, it can create inflation, so in the current environment, a rise in unemployment can be a positive sign. Canada’s unemployment (currently 5.50% as of August 2023) has been slowly rising since May 2023 after stagnating at 5.00% for almost 6 months, which has been a positive sign that rate increases have been having their intended effect on the labour market as well.
Canada Unemployment Rate. Source: Tradingeconomics.com | Statistics Canada
One of the most important indicators for the BOC measures is the average change in prices for a market basket of consumer goods. BOC is most interested in ensuring that inflation is under control as this has a huge influence on their rate decisions, and they target a range of 2-3% as a benchmark for an acceptable level of inflation.
Canada Inflation Rate. Source: Tradingeconomics.com | Statistics Canada
The inflation rate rose slightly in July to 3.30% (from the previous 2.80%), largely due to fluctuations in gas prices, but BOC is waiting for additional data to see any trends. BOC does expect inflation to hit its target of 2% by late 2024 or early 2025 and will continue to monitor this data attentively in assisting with any future rate decisions.
The BOC comments are always very cryptic with regard to the future direction of rate policy, but in the most recent meeting, the governor seemed a little more optimistic and noted that the central bank’s 2-per-cent inflation target is “now in sight,” suggesting that we’ve likely hit peak rates.
Variable rate holders have seen rates increase almost 5% (10 rate increases) since last year, which has had a huge impact on cash flow, especially given the short-term and sudden nature of these increases.
It’s not just mortgage rate increases but overall living expenses have gone up for Canadians. Recent data published by OpenTable showed that fewer Canadians are going out for dinner, suggesting that the impacts of higher costs and inflation are cutting into their budgets.
Economic forecasts are an excellent tool to understand where rates could end up. These should be reviewed with cautiously as data changes very quickly, but it is very helpful in attempting to predict what type of mortgage to consider.
On average, most big bank economists predict rates to decrease between 0.75 and 1.50% from where we are today. Currently, the overnight rate is at 5.00%, and Prime is at 7.20% for most banks. A rate decrease would be a huge break for variable-rate mortgage holders.
How to position yourself today when looking at a new mortgage or upcoming renewal
The next Bank of Canada announcement is scheduled for October 25, 2023.
A financial review is key to ensuring you can navigate the current climate. Let’s chat and see how we can help if we haven’t already.
We’re all in this together and will come out stronger together.
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