Bank of Canada raises policy rate by 25 bps to 4.5%.

Bank of Canada Peter Carstensen 26 Jan

Canadians are reeling once again from another overnight rate hike.
Here’s what Dominion Lending Centre’s Chief Economist, Dr. Sherry Cooper, says about the rate hike on January 25, 2023.

No Surprises Here: The Bank of Canada Hiked Rates By Only 25 bps, Signalling A Pause

As expected, the Bank of Canada–satisfied with the sharp decline in recent inflation pressure–raised the policy rate by only 25 bps to 4.5%. Forecasting that inflation will return to roughly 3.0% later this year and to the target of 2% in 2024 is subject to considerable uncertainty.

The Bank acknowledges that recent economic growth in Canada has been stronger than expected, and the economy remains in excess demand. Labour markets are still tight, and the unemployment rate is at historic lows. “However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment is expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand.”

The report says, “Canada’s economy grew by 3.6% in 2022, slightly stronger than was projected in October. Growth is expected to stall through the middle of 2023, picking up later in the year. The Bank expects GDP growth of about 1% in 2023 and about 2% in 2024, little changed from the October outlook. This is consistent with the Bank’s expectation of a soft landing in the economy.

Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods.”

Short-term inflation expectations remain elevated. Year-over-year measures of core inflation are still around 5%, but 3-month measures of core inflation have come down, suggesting that core inflation has peaked.

The BoC says, “Inflation is projected to come down significantly this year. Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3% in the middle of this year and back to the 2% target in 2024.” (the emphasis is mine.)

The Bank will continue its policy of quantitative tightening, another restrictive measure. The Governing Council expects to hold the policy rate at 4.5% while it assesses the cumulative impact of the eight rate hikes in the past year. They then say, “Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians”.

Bottom Line

The Bank of Canada was the first major central bank to tighten this cycle, and now it is the first to announce a pause and assert they expect inflation to fall to 3% by mid-year and 2% in 2024.

No rate hike is likely on March 8 or April 12. This may lead many to believe that rates have peaked so buyers might tiptoe back into the housing market. This is not what the Bank of Canada would like to see. Hence OSFI might tighten the regulatory screws a bit when the April 14 comment period is over.

Source
https://sherrycooper.com/category/articles/

Canadian Inflation Disappointingly High in November.

inflation Peter Carstensen 21 Dec

Read Dominion Lending Centre’s Chief Economist, Dr. Sherry Cooper’s thoughts on  November 2022 inflation rate and mortgage costs.

The Bank of Canada Won’t Like This Inflation Report!

November’s CPI inflation rate fell only one tick to 6.8%, despite gasoline prices falling. This follows a two-month reading of 6.9%. Excluding food and energy, prices rose 5.4% yearly last month, up from 5.3% in October. Critical gauges of underlying price pressure were mixed but continued to creep higher. The all-important three-month trend in Core CPI edged to a 4.3% annualized rate from 4.0% the month before.

This is not good news and does nothing to assuage the central bank’s concerns about inflation. Price pressures remain stubbornly high, even as the economy slows and higher borrowing costs start to curb domestic demand.

Slower price growth for gasoline and furniture was partially offset by faster mortgage interest cost and rent growth. Headline inflation fell just one tick to 6.8% following two months at 6.9%, and core inflation remains sticky.

Digging into the still-strong core results revealed some new areas of concern. After years of helping hold back inflation, cellular services rose 2.0% y/yon “fewer promotions,” while rent took a big step up and is now at a 30-year high of 5.9% y/y (from 4.7% last month). Mortgage interest costs are another driving force, rising 14.5%, the most significant increase since February 1983. Just six months ago, they were still below year-ago levels. The transition from goods-led to services-driven inflation continues apace, with services prices up 5.8% y/y, or double the pace a year ago.

Prices for food purchased from stores rose 11.4% yearly, following an 11% gain in October.

Bottom Line

Before today’s report, traders were pricing in a pause at the next policy decision, with a possibility of a 25 basis-point hike. Barring an excellent inflation report for December, another rate hike is likely on January 25, likely a 25 bp hike. Given what’s happened in the first three weeks of this month, there is a good chance that the almost 14% drop in gasoline prices (compared to a 4% decline in December a year ago) could pull this month’s headline inflation down to 6.5%. However, many components of core inflation continue to rise.

While the BoC will slow the rate hikes in 2023, at least two or three more hikes are still possible, with no rate cuts likely next year. Remember, wage inflation is running at 5.6% y/y, and wage negotiations are getting more aggressive.

Read the full article here:

Canadian Inflation Disappointingly High in November

Bank of Canada Hikes Overnight Rate 50 bps to 4.25%

Bank of Canada Peter Carstensen 7 Dec

On December 7 2022, the Bank of Canada raised interest rates as had been expected. Dominion Lending Centre’s Chief Economist, Dr. Sherry Cooper, shares her thoughts on the rate hike below.

The Bank of Canada Hiked Rates The Full 50 bps

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by 50 basis points today to 4.25% and signaled that the Council would “consider whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.” This is more dovish language than in earlier actions where they asserted that rates would need to rise further. Some have interpreted this new press release to imply that the Bank of Canada will now pause or pivot. I disagree.

I expect there will be additional rate hikes next year, but they will be more measured and not on every decision date. I also feel that the Bank will refrain from cutting the policy rate until 2024.

The Bank told us today that the “longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.” CPI inflation remained at 6.9% in October, “with many of the goods and services Canadians regularly buy showing large price increases. Measures of core inflation remain around 5%. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. However, inflation is still too high, and short-term inflation expectations remain elevated.”

The economy remains in excess demand, and the labour market is very tight. The jobless rate in November fell to 5.1%, and job vacancies increased in September. Wage inflation came in at 5.6% y/y in November for the second consecutive month, marking six straight months of wage inflation above 5%. While headline and core inflation have moderated from their recent peaks, they exceed the 2% target by a large measure. 

The Bank will monitor incoming data, especially regarding the overheated labour market where the jobless rate is at historic lows. Housing has slowed sharply in recent months, but as long as labour markets are tight, a slowdown in other sectors will be muted. The Bank now says it expects the economy “to stall” in the current quarter and the first half of next year.

Bottom Line

This will likely be the last oversized rate hike this cycle. The Governing Council next meets on January 25. Whether they raise rates will be data-dependent. If they do, it will likely be by 25 bps. Even if they pause at that meeting, it does not rule out additional moves later in the year if excess demand persists. I expect further monetary tightening, the continued bear market in equities, and a further correction in house prices. 

Canadian benchmark home prices are already down nearly 10% nationwide. Several chartered banks told us this week that more than 25% of the remaining amortizations for their residential mortgages are 35 years and more. At renewal, these institutions expect to grant mortgages amortized at 25 years, which implies a substantial rise in monthly payments. That may well be three or four years away, but clearly, many households could be pinched unless mortgage rates plunge in the interim. I do not see the policy rate falling to its pre-Covid level of 1.75% over that period because inflation back then was less than 2%, an improbable circumstance as we advance. Although supply constraints may be easing, globalization has peaked. Semiconductors produced in the US will not be as cheap, and many rents, prices, and wages will be very sticky.

Source: https://sherrycooper.com/articles/bank-of-canada-hikes-overnight-rate-50-bps-to-4-25/

Little Comfort for the Bank of Canada in Today’s Jobs Report

Bank of Canada Peter Carstensen 2 Dec

Following the release of the labour force survey for the month of November, Dominion Lending Centres’ Chief Economist, Dr. Sherry Cooper, has posted some thoughts on the report.

Below is Dr. Cooper’s summary:

Today’s Labour Force Survey for November will do little to assuage the Bank of Canada’s concern about inflation. While employment growth slowed to 10,100 net new jobs–down sharply from October’s reading–the report’s underlying details point to excess labour demand and rising wages. This is compounded by Monday’s data release showing that the Canadian economy grew by 2.9%, double the rate expected by the Bank of Canada. Everyone expects a slowdown in the current quarter and a modest contraction in the new year. However, excess demand is still running rampant in almost everything except housing.

Indicative of hiring strength, full-time employment was up a robust 50,700, and the private sector added 24,700 jobs. The jobless rate ticked down for the second consecutive month to 5.1%–well below the 5.7% rate posted immediately before the pandemic, which was considered full employment at that time. Total hours worked edged up, consistent with growth in the fourth quarter. And most notably, wage inflation came in at a year-over-year pace of 5.6% in November, the sixth consecutive month of greater than 5% wage inflation. Moreover, private and public sector unions demand even more significant wage gains as inflation remains close to 7%.

Businesses report difficulty filling jobs as job vacancies rose in the latest reading. The employment rate among core-aged women reached a new record high of 81.6% in November.

Employment rose in finance, insurance, real estate, rental and leasing, manufacturing, information, culture, and recreation. At the same time, it fell in several industries, including construction and wholesale and retail trade.

While employment increased in Quebec, it declined in five provinces, including Alberta and British Columbia.

Bottom Line

Today’s data are the last key input into the Bank of Canada’s December 7 interest rate decision. Overnight swap markets are fully pricing in a 25 basis-point hike next week, with traders putting about a one-third chance on a 50 basis-point move. Rising wages show no sign of cooling, and the economy posted much more robust growth in the third quarter than the Bank expected. 

The overnight policy rate target is currently at 3.75%. If I were on the Bank’s Governing Council, I would vote for a 50-bps rise to 4.25%. Returning to a more typical 25 bps rise is premature, given inflation is a long way above the Bank’s 2% target. Inflation will not slow, with consumers and businesses expecting continued high inflation. Wage-price spiralling is a real risk until inflationary psychology can be broken. 

In either case, additional rate hikes early next year are likely. Even when the central bank pauses, it will not pivot to rate cuts for an extended period. Market-driven longer-term interest rates have fallen significantly as market participants expect a recession in 2023. Fixed mortgage rates have fallen as well. The inverted yield curve will remain through much of 2023, with a housing recovery in 2024.

https://sherrycooper.com/articles/little-comfort-for-the-bank-of-canada-in-todays-jobs-report/

Homeowners with variable mortgages squeezed between rising rates and falling home prices

General Peter Carstensen 1 Dec

The Bank of Canada is widely expected to raise its benchmark rate yet again on Dec. 7

Mortgage brokers say homeowners with variable-rate mortgages will be squeezed even further next week, as the Bank of Canada is widely expected to raise the country’s key lending rate as part of its continued efforts to curb rapidly rising inflation.

The rate adjustment is scheduled for Dec. 7, and if it happens the way most are predicting, it will be the seventh such hike in the prime rate since March.

Variable rate mortgages, where payments are linked to the rise and fall of the country’s key lending rate, account for about a third of all mortgage debt in the country, according to the Bank of Canada.

They grew in popularity during the COVID-19 pandemic, as housing prices soared while interest rates were close to zero — keeping many buyers’ payments significantly lower than if they were to choose a fixed-rate mortgage.

Now that interest rates are rising, and home prices are falling, many homeowners who bought at the market’s peak have found themselves questioning whether they made the right choice and if it’s not too late to make a change.

‘Should I lock in?’ There’s no easy answer

“Should I lock in? That’s the million dollar question right now, and it’s a tough question to answer,” said Dani Hanna, a mortgage broker and owner of the Mortgage Firm in London, Ont.

“The reason the rates have been increasing so quickly is because of inflation. Inflation is through the roof. We could see that start to subside in the next couple of months, and if that starts to subside, could we see interest rates go down? Possibly,” he said.

It’s why some mortgage brokers are reticent to advise their clients to lock in now at a fixed rate.

If inflation starts to slow, the central bank could lower rates again, bringing payments down with them. If a homeowner were to switch to a fixed rate, they could be stuck paying significantly more than they would have if they just kept a variable rate, Hanna said.

“For me, I ask my clients, ‘is this keeping you up at night? Are you stressed out about the fact that your payment can increase again?’ If the answer is ‘yes,’ then I strongly recommend locking into the fixed rate,” he said.

“If you have the ability to maintain these higher payments for now — ride the wave. See what happens. The Bank of Canada has mentioned that it has started to slow down on the increases, which means your payment won’t go up”

Half of all variable rate mortgages hit trigger rate in October

Part of the reason is that many borrowers are reaching the point where the interest portion of their payment has become larger than the principal, called the trigger rate.

A recent analysis by the Bank of Canada estimated half of all variable rate mortgages in Canada hit their trigger rate last month.

The analysis said it is anticipated “variable mortgage rates will increase by another 50 basis points by mid-2023.” At that point, it’s believed the number of variable rate mortgages to hit their trigger point will be 65 per cent, or 17 per cent of all mortgages in Canada.

In London, Ont., the average price of a home has fallen for eight months to roughly $640,000 in October, down from the market’s peak of about $825,000 in February.

“It’s tough,” said Mark Mitchell, a London, Ont., mortgage broker with Real Mortgage Associates. “Rates have gone sky-high.”

Like many financial experts, Mitchell anticipates a hike of at least 50 basis points on Dec. 7, putting the Bank of Canada prime rate at 4.25 per cent. He believes there are more to come, putting homeowners who chose variable rate mortgages in an even more difficult position.

“The prime rate is 3.75 and the inflation rate is seven. Historically, the prime rate is supposed to be higher than inflation. Now I don’t think they’re going to go that far, but they still have a ways to go.

“All signs point to it’s going to get worse before it gets better.”

Mitchell said he’s advising borrowers with a variable rate mortgage to lock in now to avoid even more pain down the road, but if a client can’t afford to lock in because the payments are too high, he said it might be time to consider selling.

“I’m already seeing a lot of anticipatory selling because it’s too high for them to lock in,” he said. “There’s a lot of pain out there. It’s been a lot of tough conversations as of late, that’s for sure.”

Mitchell said many people who are considering selling a home they can’t keep are looking at renting, but they likely won’t see any relief there as rental rates also rose alongside real estate prices during the frenzy of the pandemic.

“The payments are just as high as you were paying, if not more, than when you owned your home, unfortunately.”

Source CBC.ca

Colin Butler

https://www.cbc.ca/news/canada/london/variable-rate-mortgage-interest-1.6667899

Why should Canadians care about inflation?

General Peter Carstensen 12 Oct

Inflation directly impacts your purchasing power.

Now more than ever, Canadians want to be financially empowered. At Dominion Lending Centres, we rely on insights from our Chief Economist, Dr. Sherry Cooper, a 30-year industry veteran, speaker, and author.

In the video link below, Dr. Cooper explains why Canadians should care about inflation.

https://www.youtube.com/watch?v=r5YGf7ccOcY

A Super-Sized Rate Hike, Signalling More To Come – Economic Insights with Dr. Sherry Cooper

Latest News Peter Carstensen 15 Jul

Bank of Canada Shocks With 100 bps Rate Hike.
A Super-Sized Rate Hike, Signalling More To Come

Published by Sherry Cooper

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by a full percentage point to 2-1/2%. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates.

In its press release this morning, the Bank said that “inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months… While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%.”

The Bank is particularly concerned that inflation pressures will become entrenched. Consumer and business surveys have recently suggested that inflation expectations are rising and are expected to be higher for longer. Wage inflation has accelerated to 5.2% in the June labour Force Survey. The unemployment rate has fallen to a record-low 4.9%, with job vacancy rates hitting a record high in Ontario and Alberta.

Central banks worldwide are aggressively hiking interest rates, and growth is slowing. “In the United States, high inflation and rising interest rates contribute to a slowdown in domestic demand. China’s economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile. The Bank expects global economic growth to slow to about 3½% this year and 2% in 2023 before strengthening to 3% in 2024.”

Further excess demand is evident in the Canadian economy. “With strong demand, businesses are passing on higher input and labour costs by raising prices. Consumption is robust, led by a rebound in spending on hard-to-distance services. Business investment is solid, and exports are being boosted by elevated commodity prices. The Bank estimates that GDP grew by about 4% in the second quarter. Growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.”

In the July Monetary Policy Report, released today, the Bank published its forecasts for Canada’s economy to grow by 3.5% in 2022–in line with consensus expectations–1.75% in 2023 and 2.5% in 2024. Some economists are already forecasting weaker growth next year, in line with a moderate recession. The Bank has not gone that far yet.

According to the Bank of Canada, “economic activity will slow as global growth moderates, and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.”

Bank of Canada Overnight Rate
Bottom Line
Today’s Bank of Canada reports confirmed that the Governing Council continues to judge that interest rates will need to rise further, and “the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.” Once again, the Bank asserted it is “resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.”

At 2.5%, the policy rate is at the midpoint of its ‘neutral’ range. This is the level at which monetary policy is deemed to be neither expansionary nor restrictive. Governor Macklem said he expects the Bank to hike the target to 3% or slightly higher. Before today’s actions, markets had expected the year-end overnight rate at 3.5%.

https://dominionlending.ca/economic-insights/bank-of-canada-shocks-with-100-bps-rate-hike