Are Canadian mortgage rates about to plummet? | About That

Summary

The Bank of Canada was initially expected to cut interest rates slowly in 2024 to support economic growth without risking inflation. However, recent developments, including a rate cut by the U.S. Federal Reserve, have pushed Canada to consider more aggressive cuts. The Canadian economy faces rising unemployment, slow GDP growth, and lower inflation, prompting economists to predict larger interest rate reductions. While this could boost sectors like housing, there are concerns about potential inflation resurgence, making the Bank of Canada's next moves critical to balancing economic recovery.

Takeaways

• 📉 In June, economists anticipated that the Bank of Canada would cautiously and slowly cut interest rates, expecting 2-3 quarter percentage point cuts in 2024.
• 🔄 Canada was one of the first countries to cut rates due to rising unemployment, stalled GDP, and low productivity, aiming to stimulate the economy.
• 🚫 There were initial concerns about cutting rates too quickly, which could lead to inflation and desynchronization with the US economy.
• 📉 This week, inflation in Canada cooled to 2% in August, aligning with the Bank of Canada's target for the first time since 2021.
• 🇺🇸 The US Federal Reserve's recent half percentage point cut to its benchmark rate has influenced Canada's monetary policy considerations.
• 💹 A significant reason for the Bank of Canada's cautious approach was to avoid falling out of sync with US monetary policy, which could deter investment and weaken the Canadian dollar.
• 🛑 The US rate cut signals potential economic weakness, which could impact Canadian exports and manufacturing, necessitating a response from the Bank of Canada.
• 📈 The Bank of Canada may now have more room to cut rates without worrying about inflation resurfacing, especially if the US continues its easing cycle.
• 📊 Economists predict that the Bank of Canada could make larger cuts in the coming months, possibly lowering rates by 100 basis points within the next 3 months.
• 🏠 For those looking to buy a home or holding loans, the current interest rate outlook is positive, as lower rates could reduce borrowing costs.

Q & A

What was the initial expectation of economists regarding the Bank of Canada's interest rate cuts?

Initially, economists expected the Bank of Canada to continue cutting interest rates, but at a cautious and slow pace, with two or three quarter percentage point rate cuts anticipated in 2024.

Why did the Bank of Canada decide to cut interest rates?

The Bank of Canada decided to cut interest rates because of rising unemployment, a stalling GDP, and an all-time low productivity, which indicated that the economy needed a boost.

What was the concern regarding cutting interest rates too fast?

There were concerns that cutting interest rates too fast could drive inflation up and fall out of sync with the US, potentially making Canada a less attractive place for investment and leading to a weaker Canadian dollar.

Why did the Bank of Canada's approach to interest rate cuts change recently?

The approach changed because headline inflation cooled to 2% in August, returning to the Bank of Canada's target for the first time since 2021, and the US Federal Reserve made a significant half percentage point cut to its benchmark rate.

What impact did the US Federal Reserve's interest rate cut have on Canada?

The US Federal Reserve's interest rate cut could spur the Bank of Canada to make further cuts, as falling too far out of sync with the US can be problematic for monetary policy.

How does a weaker Canadian dollar affect the Canadian economy?

A weaker Canadian dollar means Canadians get less for their money when importing goods from the US, leading to higher prices at the pump and contributing to a higher rate of inflation.

What is the main concern of the Bank of Canada when it comes to inflation?

The Bank of Canada's main concern is to keep inflation under control. Even if the economy is struggling, its primary job is to bring inflation down if it's out of control.

What was the inflation rate in Canada two years ago, and what actions did the bank take?

Two years ago, Canada's inflation rate was over 8%. The bank responded by hiking interest rates multiple times to slow the economy and reduce inflation.

What is the current inflation rate in Canada, and how does it affect the Bank's interest rate decisions?

The current inflation rate in Canada is 2%, which is close to the bank's target. This gives the Bank of Canada more room to cut rates without the risk of inflation resurfacing.

What is the expected impact of the Bank of Canada's rate cuts on the housing market?

If lowering mortgage rates causes a dramatic bounceback in the housing market, it could lead to inflation going back up, which would require the bank to adjust its policies accordingly.

What is the expected timeline for the Bank of Canada to reach a neutral interest rate?

It was initially expected to take up to 2 years to get back down to around 3%, but with recent changes, it might take less time, possibly reaching a lower neutral rate by the end of 2025.