Lower Mortgage Rates a Possibility Amid Economic Uncertainty

Lower Mortgage Rates a Possibility Amid Economic Uncertainty

According to a recently released summary of discussions, the Bank of Canada is considering reducing interest rates this year. However, officials are divided over the timing of this decision. The governing council believes a rate cut may be necessary if the economy progresses as predicted, but there is disagreement about the expected timeline. On March 6, Governor Tiff Macklem and the Governing Council maintained the policy rate at 5 %, marking a 5th consecutive hold since the previous summer. 

The U.S. Federal Reserve, on Wednesday, mirrored the Bank of Canada’s indications concerning monetary policy direction. Despite the steady benchmark rate, the Fed released a fresh “dot plot.” This illuminated committee members’ prediction of 3 rate cuts in 2024. Considering the unforeseen robustness of the U.S. economy, the market took a sigh of relief since numerous analysts had anticipated the Fed to scale down their projections for rate cuts.

Concerns Over Persistent Inflation

Canada’s top central bankers are openly discussing the timing of rate cuts, expressing concerns about persistent underlying inflation and the potential consequences of hastily implementing monetary policy. The members agreed that the conditions for rate cuts would become possible throughout the year if the economy follows the Bank’s projection. Members of the Governing Council had varying opinions regarding the timeline for determining whether these conditions were met and how to consider the potential risks to the future forecast.

Unexpected Decline in Inflation

The case for reducing interest rates gained support as Statistics Canada revealed an unexpected decline in inflation for February. The consumer price index increased by 2.8% annually, marking the 2nd month that inflation has returned to the Bank of Canada’s target range of 1% to 3%. Following this information, analysts and traders on Bay Street increased their predictions that the central bank will initiate a decrease in interest rates in June. Policymakers are concerned about a potential resurgence in the real estate sector as prospective buyers may return to the market anticipating interest rate reductions.

The Impact of Housing Inflation

Shelter inflation, the primary contributor to overall CPI inflation, poses a significant obstacle for the central bank. A significant portion of this inflation can be attributed to the increasing rent costs. Policymakers have acknowledged that rising rental prices result from an imbalance between housing supply and population growth, an issue that cannot be resolved through adjustments to interest rates.

Considering Other Factors in Determining Interest Rates

According to some experts, the bank may need to consider factors other than housing inflation in determining interest rates. However, the bank does not appear enthusiastic about this viewpoint. The Governing Council acknowledged that the Bank’s policy rate hikes have escalated mortgage interest costs (MIC), significantly impacting housing price inflation. Considering the cycle of mortgage renewal, these increased mortgage interest expenses will persistently, albeit not indefinitely, affect the Consumer Price Index (CPI) inflation. 

Additionally, they concurred that if MIC were solely responsible for sustained inflation, there might be room to overlook them and avoid unnecessarily hindering economic activity to bring the headline inflation back to the 2% mark. However, this is not the scenario at present. Most housing inflation elements, such as rental and homeownership costs (including insurance, taxes, and repairs), rose notably in January. In addition, recent data clarified that inflationary forces remain widespread, and a consistent downward trend in underlying inflation has yet to be seen.

Broad View of “Underlying Inflation”

Another important point presented in the document is that the Governing Council views “underlying inflation” broadly. Over several months, it has been stated that they desire to witness a consistent decrease in fundamental inflation before implementing any rate reductions. In addition to assessing the level of fundamental inflation, Mr. Macklem and his team also monitor various indicators, such as the overall equilibrium of supply and demand in the economy, corporate pricing trends, expectations for inflation, and wage changes.

Wage Increase Exceeds Expectations

Although many of these factors show positive trends, the rate of wage increase has exceeded the bank’s expectations for achieving 2% inflation. Nevertheless, the dynamics of the job market are starting to shift. According to the summary, members of the Governing Council observed an easing in wage pressures in the Labour Force Survey.

Easing wage pressures is good news for homeowners and prospective homebuyers, and they should prepare for even lower mortgage rates within the next 3 to 4 months. As mortgage interest-carrying costs abate, expect housing costs to escalate as a lower bar for stress testing. Contact your nesto mortgage expert to find your best mortgage rate.