The Bank of Canada maintains the policy interest rate at 5%

Announced yesterday April 10th, the Bank of Canada decided to hold the overnight interest rate for the 6th time in a row.

In this blog, I’m going to be covering the reasoning behind their decisions to hold the overnight interest rate, taking a look at what the Bank of Canada had to say at the end of their press release that could be a potential hint as to rate drop in the near future. 

“The Bank expects the global economy to continue growing at a rate of about 3%, with inflation in most advanced economies easing gradually.”

Typically, between 2-3% is a healthy growth rate for an economy, with that being said, the Bank of Canada has been trying to slow down the economy for quite some time with these overnight rate increases and quantitative tightening. So 3% is a little bit higher than what they are looking for, so for the BOC to consider dropping the overnight rate, they’ll need to see that number come down. The whole point of dropping the overnight rate is to help out a struggling economy, why drop rates when the economy is growing at a 3% rate? Also mentioned in that quote is that inflation is easing gradually, which is a good thing. In Canada, the CPI is at 2.8% right now and that is in the Bank of Canada’s 2-3% target range, but the Bank of Canada continues to remain cautious with the overnight rate, they aren’t looking to make any drastic moves as they have in the past (look where that got us) and they fear that with this strong economy and labor market if they drop rates, inflation could take off again. 

“A broad range of indicators suggest that labour market conditions continue to ease. Employment has been growing more slowly than the working-age population and the unemployment rate has risen gradually, reaching 6.1% in March. There are some recent signs that wage pressures are moderating.”

A slowing labor market is like a double-edged sword, yes, people will be losing their jobs, but our labor market has been so tight these past couple of years that it’s held inflation high. So as our labor market eases, we are seeing unemployment rising gradually, As stated in the article it hit 6.1% in March, these signs are potentially signaling future economic easing which could lead to rates dropping. 

“CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs.”

The main driver in inflation is shelter price. If we were to exclude shelter costs from the CPI basket used to monitor inflation, the CPI would be at 1.5% right now. As stated in the article this is highly driven by growth in rent and mortgage interest cost. The thing I find challenging to understand is a lot of things that are being done to fight high home prices and rent, and all the actions that are being taken seem to target the demand side. Higher rates are trying to lower demand for homes, taxes, and restrictions the government continues to add, are trying to lower the demand for homes and they just aren’t working. It’s no secret that Canada has a housing shortage, but the government seems to be tiptoeing around fixing the supply side which is the true issue in our market and the ONLY long-term solution. Not to mention, Canada let in a large amount of immigrants these past couple of years, which we do need, but,  Canada’s population grew by more than 430,000 during the third quarter of 2023, marking the fastest pace of population growth in any quarter since 1957 which many would argue with an already hot economy and home prices out of reach for many, was this too much. As immigration has been increasing Canada has not been investing enough to keep up with this new demand not just in the housing market, but also in other areas of our infrastructure hospitals with people waiting hours on end to see a doctor, and schools where classroom sizes continue to increase. To put it into perspective, Canada is inviting people over for dinner, but there is not enough food for everyone to eat. 

“The Council will be looking for evidence that this downward momentum is sustained. Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

So we are seeing downward movement in our economy, which in terms of interest rates dropping is a good thing, the BOC is looking to see if this momentum continues, inflation keeps leveling out, wages and the labor market continue to soften, and our economy continues to slow, if we see some consistency in these metrics we can expect a rate cut to happen at some point. The question is when is that point? The next rate announcement is June 5th, I don’t think a rate cut will come at that point just due to the fact that the BOC is going to be extra cautious on the way down, so potentially look to the July 24th cut to see our first cut.

Thanks for reading this blog, if you’d like to connect with me for more info about this blog or you are looking to speak about mortgage financings you can call my office at 519-250-4848 or email [email protected] and either myself or one of my senior mortgage agents will be happy to help.