Are Canadian mortgage rates about to plummet? | About That
Summary
TLDRThe 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.
Outlines
📉 Canada's Evolving Interest Rate Strategy
Just a few months ago, economists predicted the Bank of Canada would proceed cautiously with cutting interest rates, expecting two or three quarter-point cuts in 2024. Canada was among the first countries to reduce rates due to rising unemployment, stalling GDP, and low productivity. Despite the need for growth, inflation control remained a concern, and analysts warned against cutting rates too quickly. However, this week saw a significant shift when inflation hit 2%, aligning with the Bank of Canada's target for the first time since 2021. Meanwhile, the U.S. Federal Reserve made a sharp half-point rate cut, prompting speculation that Canada might accelerate its rate reductions to stay in sync and avoid economic divergence.
🇺🇸 US Rate Cut's Impact on Canada
In the U.S., the last time interest rates were this low was during the pandemic, making this week's rate cut by the Federal Reserve big news in both the U.S. and Canada. Economists believe the U.S. cut will spur the Bank of Canada to make more cuts, despite the Canadian economy teetering on the brink of recession. Falling out of sync with U.S. rates could make Canada less attractive for investors, weaken the Canadian dollar, and drive up the cost of U.S. imports, including gasoline, thereby contributing to inflation. If Canada doesn't act, the economic risks could multiply, especially with the U.S. now adopting a more aggressive rate-cutting strategy.
🏦 The Argument for Faster Canadian Rate Cuts
The Bank of Canada faces a dilemma: with inflation now at 2%, the economy is showing signs of slowing down. Two years ago, inflation was over 8%, forcing the Bank to raise rates repeatedly to control price surges. While this strategy worked to curb inflation, it also slowed GDP growth and pushed unemployment higher. With unemployment at 6.6% and GDP growth below forecasts, economists now predict larger interest rate cuts are needed. Upcoming Bank of Canada meetings in October and December are expected to feature substantial cuts, possibly amounting to 100 basis points over the next few months, as the Bank seeks to balance inflation control with economic recovery.
📉 Potential Risks in Housing and Economic Outlook
As Canada contemplates larger rate cuts, there's concern about a potential rebound in the housing market, which could reignite inflation. The Bank of Canada may have to continue adjusting its policy based on market conditions. However, for now, the outlook for lower interest rates is good news for mortgage holders and those looking to buy a home or manage loans. While there's optimism for faster rate cuts, economists caution that unforeseen economic shifts could lead to further policy adjustments.
Mindmap
Keywords
💡Interest Rates
💡Bank of Canada
💡Inflation
💡GDP
💡Unemployment
💡Productivity
💡Monetary Policy
💡US Federal Reserve
💡Exchange Rate
💡Recession
💡Neutral Rate
Highlights
Economists initially predicted the Bank of Canada would cut interest rates cautiously with two or three quarter percentage point cuts in 2024.
Canada started cutting rates earlier than other countries due to rising unemployment, stalling GDP, and low productivity.
The Bank of Canada was cautious in cutting rates due to concerns about inflation, which still wasn't fully under control.
This week, the US Federal Reserve aggressively cut interest rates by half a percentage point, signaling a shift in monetary policy.
The Fed's decision to cut rates by a larger margin has pressured Canada to consider following suit to avoid economic misalignment.
Falling out of sync with the US on interest rates could weaken the Canadian dollar and make Canada less attractive to investors.
A weaker Canadian dollar increases import costs, including gas, which could push inflation back up.
The aggressive rate cut in the US signals economic weakness, which could further affect Canada's economy, especially in exports and manufacturing.
The Bank of Canada's primary focus remains inflation control, with the aim of keeping it at 2%.
While inflation in Canada is now at 2%, GDP growth has slowed to zero, and unemployment is rising.
Economists predict that the Bank of Canada could shift to more aggressive rate cuts, similar to the US, with 50 basis point cuts expected in October and December.
The next rate cuts could bring Canada's rates down by 100 basis points within the next three months.
By the end of 2025, rates could potentially fall to 2.25%, which would be considered stimulative for the economy.
Lowering interest rates could lead to a resurgence in the housing market, which could in turn increase inflation again.
For now, the interest rate outlook is positive for those with mortgages, car loans, or lines of credit, as lower rates could offer relief.
Transcripts
just a few months ago in June pretty
much every Economist we spoke to
expected the Bank of Canada would
continue to cut interest rates but the
pace would be cautious and slow
realistically we're talking two or three
of these quarter percentage Point rate
Cuts in 2024 our best guess is that it
could take it up to 2 years uh to
ultimately get back down to around 3% or
what the bank considers to be normal
Canada was actually one of the first
countries to start cutting rates a few
months ago because Central Bankers took
a look around nationally and saw
unemployment Rising GDP stalling
productivity at an all-time low and they
decided the economy needed a boost we
need growth to start picking up we need
job creation to uh start picking up but
the plan was to take things slow because
inflation still wasn't under control
cutting rates risks driving inflation up
and according to the analyst we spoke to
there were concerns about cutting
interest rates too fast and falling too
far out of sync with the us but this
week all of that changed headline
inflation cooled to 2% in August
returning to the bank of Canada's Target
for the first time since 2021 the
Federal Reserve today delivering a jolt
to the US economy a half percentage
point cut to its Benchmark rate so our
neighbor to the South cutting hard and
fast we wanted to know would that push
Canada to do the same let's go through
[Music]
interest rates in the US have been stuck
for a long time the last time their
interest rates went down half the
country was under a pandemic lockdown
and Tiger King had just come out on
Netflix so this week's announcement that
the FED finally cut their key rate was
big news not only in the US but here in
Canada too US Federal Reserve chair
Jerome Powell has announced he will
lower interest rates by a sizable half a
percentage Point economists say that
this cut today in the US will uh spur
the Bank of Canada on to make further
cuts to in its interest rate according
to the analysts we spoke to one of the
reasons the Bank of Canada has so far
been sticking to small quarter
percentage Point Cuts even as the
economy Teeters on the edge of a
recession is that falling too far out of
sync with the US can be a problem there
was an element that if the Americans
didn't start cutting soon we might
actually see the bank of Canada pause
interest rates not because we are
working with them but because we realize
that by not moving in rough lock step
with each other it's actually bad
monetary policy to go It Alone yes
because consider how going it alone
makes Canada a less attractive place to
invest I mean just think about it
interest rates going down means
investors get less return and if the US
keeps its rates High all the more reason
for investors to pull their money out of
Canada put it into the US and the
Canadian dollar gets weaker meaning
everything we import from the US costs
us a lot more one big issue with that
the price of gas it's always priced in
US dollars so a weaker Canadian dollar
means Canadians get less gas for the
same amount of money which translates to
higher prices at the pump and higher
prices at the pump contribute to a
higher rate of inflation the whole
reason that the Bank of Canada was
cutting interest rates was because they
didn't fear inflation in the foreseeable
future but in fact their interest rate
cutting without the efforts of the
Americans cutting theirs could in fact
be counterproductive which brings us
back to this week when the FED went from
cautious to aggressive they didn't just
cut a quarter percentage Point as
Canada's been doing they cut half a
percent and they made it clear that more
cuts are coming we know that it is time
to recalibrate our our our policy to
something that is more appropriate given
the progress on inflation and on uh
employment moving to a more sustainable
level because now the US is taking what
I would deem the start of a very
aggressive uh easing cycle uh the
Canadian dollar May strengthen that does
give the room then for the Bank of
Canada to say all right now that we
don't have to worry about inflation
resurfacing through the exchange rate
Channel then yeah we have a little more
room to go about cutting rates but the
other reason the Bank of Canada might
want to mirror the us rate cut is
because of what that rate cut signals
about the strength of the US economy or
the lack of it people don't cut rates
because the econom is doing great they
cut rates generally because the economy
needs a little bit of a boost Canadian
exports are not doing all that well the
the Canadian manufacturing sector is not
in a strong very strong position you
know as they say the US sneezes Canada
catches a coal so yeah it's all
connected if the US economy slows so do
Canada's all the more reason for the
Bank of Canada to speed up those rate
Cuts something the governor of the Bank
of Canada said just last week he would
[Music]
consider now let's be clear there's one
number that matters most to the Bank of
Canada and that's the inflation rate it
doesn't matter how much the economy is
struggling if inflation is out of
control its main job is to bring it down
2 years ago Canada inflation rate was
over 8% and the price of pretty much
everything was surging fast so the bank
hiked interest rates again and again and
again mortgages car loans lines of
credit they all got more expensive and
that meant people started spending Less
on everything else Furniture food
vacations exercise equipment and less
demand led to lower prices and
eventually lower inflation that was the
plan
and it worked but did it work a little
too well they raised interest rates
hoping that would slow the economy and
that would bring price growth inflation
back down to earth and largely that has
worked but GDP has slowed to zero and
the momentum is moving in all the wrong
directions inflation is now down to 2%
but the bank seems increasingly worried
that it might actually fall below that
2% Target and push the economy into
recession like territory this is another
argument for the bank to speed up its
Cuts we're still slowing the economy by
how high interest rates are but we don't
need to slow in anymore because
inflation is close to Target um and we
need to accelerate the place the pace to
get to neutral because unemployment rate
is rising in Canada we don't want it to
go any higher last month the
unemployment rate shot up to
6.6% that's up from under 5% 2 years ago
and estimates show that the GDP only
grew about half a percent in the third
quarter compared to last year well below
the bank's forecast all of this has
economists predicting the next few Cuts
could be big ones I do expect instead of
25 basis point cuts at their next two
meetings which I have right here October
23rd is the next meeting and then
December 11th um I expect to see 50
basis point cuts at both of those
meetings so lower by 100 basis points
within the next call it 3 months and
whether or not we see these super sized
Cuts everyone we spoke to agreed barring
big unforeseen changes to the economy it
will likely take a lot less time for us
to get down to a neutral rate now and
that neutral rate could be even lower
than we expected I think we could
possibly go lower like we said 250 to
225 by the end of 2025 which is
stimulative for for the economy now
important caveat to all of this and it's
something even the Bank of Canada
acknowledges if lowering mortgage rates
causes some dramatic bounceback in the
housing market causing inflation to go
back up who knows how the bank will have
to keep tweaking things in response but
for now if you're looking to buy a home
if you hold a mortgage or a car loan
line of credit today's interest rate
Outlook probably comes as very welcome
news
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