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Interest Rates Will Stay Higher For Longer
General Bob Rees 13 Jul
General Bob Rees 13 Jul
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General Bob Rees 7 Jun
*** Thank you to our partners at First National for the below analysis. Bank of Canada increases Prime by .25% today.***
Today, the Bank of Canada increased its overnight interest rate to 4.75% (+0.25% from April) because of higher-than-expected growth in Canada’s economy in the first quarter and the view that monetary policy was not yet restrictive enough to bring inflation down to target.
Leading up to today’s announcement, many economists feared that the BoC would have no choice but to raise rates in the face of persistent inflation and recent GDP growth. Their fears were founded.
To understand the Bank’s thinking on this important topic, we highlight its latest observations below:
Inflation facts and outlook
Canadian housing and economic performance
Global economic performance and outlook
Summary and Outlook
The BoC said that based on the “accumulation of evidence,” its Governing Council decided to increase its policy interest rate, “reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”
The Bank says quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet.
Going forward, the Bank said it will continue to assess the dynamics of core inflation and the outlook for CPI inflation with particular focus on “ evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving” its inflation target.
Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.”
Next up
With today’s announcement now behind us, a new round of speculation will begin in advance of the Bank’s next policy announcement on July 12th. We will keep a close watch on the market in the meantime and report on the Bank’s next move that day.
General Bob Rees 25 Apr
Thank you to our partners at First National for the below update.
Canada’s federal banking regulator has released its second, Annual Risk Outlook. The Office of the Superintendent of Financial Institutions (OSFI) is looking at whether to extend its mortgage guidelines, with an eye to reducing risk.
OSFI has identified, what it considers, nine “significant risks facing Canada’s financial system.” A potential downturn in the housing market tops that list.
“OFSI is preparing for the possibility, but not predicting, that the housing market will experience sustained weakness throughout 2023,” said superintendent Peter Routledge.
High interest rates are the key concern. Higher borrowing costs present the increased possibility of defaults. Credit quality, however, so far looks quite strong and residential real estate remains sound, according to Routledge.
“What’s interesting now is how benign conditions have remained. Underlying that is a very strong economy … And Canadians are servicing the higher cost of debt quite handily.”
OSFI says it is reviewing its B20 mortgage guidelines in order to be better prepared for future risks. Its existing guidelines apply to all new mortgage originations at federally regulated lenders, including both new purchases and refinances.
OSFI is also taking a closer look at variable rate fixed-payment mortgages, which keep monthly payments the same even as rates rise by putting a bigger portion of each payment toward interest. However, some borrowers aren’t even covering interest costs, and banks are stretching out the amortization period.
General Bob Rees 28 Mar
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General Bob Rees 14 Mar
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General Bob Rees 25 Jan
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General Bob Rees 9 Jan
Thank you to our preferred lender, First National, for this insight into 2023 interest rate projections
A lot of the recent talk in financial and real estate circles has been centering on the possibility of a pause in the Bank of Canada’s aggressive interest rate increases. Some speculate that could happen at the next rate setting, later this month.
The Bank raised rates seven times last year in an effort to rein-in galloping inflation. It does seem to be working, but there are some stubborn sticking points.
Headline inflation, known as the Consumer Price Index (CPI), has dropped. It was 8.1% in July and drifted down to 6.8% in November. However, the drop from October to November was a mere one-tenth of one percentage point and the Bank’s target rate remains significantly below that, at 2.0%.
As well, the BoC’s preferred inflation measure, Core Inflation (which strips out volatile components like food and fuel), actually increased. A simple averaging of the three components that the Bank uses to measure Core Inflation came in at nearly 5.7% in November, up from 5.3% in October.
Other factors that figure into the Bank’s plans include Gross Domestic Product and unemployment. Canada’s GDP continues to grow, albeit modestly, despite rising interest rates. It increased by 0.1%, month-over-month in November. Unemployment dipped 0.1% to 5.0% in December. Both of these tend to fuel higher wages which are a key driver of inflation.
The Bank of Canada, itself, remains firmly dedicated to battling back inflation. Governor Tiff Macklem has said he would rather over-tighten than under-tighten and run the risk of having high inflation linger and become entrenched.
The U.S. central bank has made it clear it plans more rate hikes. Given the integration of the Canadian and American economies, the Bank of Canada does have to pay attention to what its American counterpart does.
The BoC will have new economic data by the time it makes its January 25th announcement. The December numbers will provide a fresh look at how well the inflation fight is going.
Normally it takes 18 to 24 months for interest rate increases to work their way into the economy and we are only about 10 months into this tightening cycle. It is reasonable to expect another 25 basis-point increase on the 25th. Given the Bank’s apparent success so far it also seems reasonable to expect a pause sometime after that.
Looking ahead to a year from now some forecasters say we might start to hear talk of interest rate cuts, which would be welcome news. Cuts would allow the BoC to move toward its, long stated, goal of normalizing rates back into the neutral range of 2.5% to 3.5%. The Bank of Canada, and central banks around the world, have been trying to do that for more than a decade – since the ’08 – ’09 financial collapse.
General Bob Rees 22 Nov
The latest Statistics Canada inflation numbers have given some market watchers hope that the Bank of Canada will slow or, perhaps, even pause interest rate increases.
The Consumer Price Index, or “headline inflation”, held steady from September to October at 6.9% on a year-over-year basis. Lower food price inflation off-set higher gasoline prices. Another welcome sign showed core inflation, which factors out volatile items like food and fuel, slowed in October to 5.3%, year/year, down from 5.4% in September. The Bank of Canada uses the core inflation reading when making its interest rate decisions.
However, those numbers will likely come as cold comfort to homeowners and homebuyers who have faced some sharp, inflationary increases.
StatsCan reports mortgage interest costs jumped by 11.4% in October – the biggest y/y increase since February 1991 (11.7%). Property taxes also rose sharply, climbing 3.6% compared to 1.5% a year ago.
StatsCan’s “homeowners’ replacement cost index’, which relates to the price of new homes, dipped to 6.9% in October, down from 7.7% in September. This measure has been declining since May (11.1%).
Statistics Canada offers a simple, plain-language explanation of how housing, or “shelter costs” fit in to the inflation calculation here.
Looking ahead to December 7th and the BoC’s last interest rate announcement for the year, most analysts expect one more 25 to 50 basis-point increase.
General Bob Rees 16 Nov
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General Bob Rees 1 Nov
Oct 31, 2022
The Bank of Canada has pushed interest rates up again, but the increase came in at the lower end of expectations.
The Policy Rate rose by one-half of a percentage point (or 50 basis-points) to 3.75%. The majority of market watchers had predicted a 75 basis-point bump. The smaller than expected increase appears to be an indication the BoC is nearing the end of this rate-hiking cycle. But it is not done yet.
“This tightening phase will come to a close. We’re getting closer to that point, but we’re not there yet. So we do expect interest rates will need to go up further,” said Bank of Canada Governor Tiff Macklem following last week’s rate announcement.
Macklem also indicated future increases would likely be smaller than what we have seen so far this cycle. That leaves the door open for another increase at the next, and final, setting for the year, in December. Several forecasts predict the Bank will pause at 4%.
The Bank believes its plan for fast, sharp increases in interest rates is working, and it is acutely aware that there is a risk of over-tightening and pushing the economy into a serious recession.
While a pause to measure the effects of its work would seem prudent, the Bank also has to take international factors into account. Key among those is the U.S. economy.
Inflation pressures in the U.S. remain higher than they are here and the U.S. central bank is expected to deliver another 75 bps increase to its policy rate this week, putting it above the Canadian rate. That would likely further devalue the Loonie against the U.S. dollar, which has implications for Canada’s broader economy.
– First National Financial LP