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.

Outlines

00:00

📉 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.

05:02

🇺🇸 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.

Keywords

💡Interest Rates

Interest rates are the cost of borrowing money, typically set by central banks to influence economic activity. In the video, interest rates are central to the Bank of Canada's monetary policy, with discussions revolving around potential cuts to stimulate the economy. The script mentions that economists initially expected cautious rate cuts, but changes in economic indicators and actions by the US Federal Reserve could lead to more aggressive cuts.

💡Bank of Canada

The Bank of Canada is the country's central bank, responsible for setting monetary policy, including interest rates. The video discusses how the Bank's decisions on interest rates are influenced by economic indicators like unemployment, GDP, and inflation. It also touches on the bank's cautious approach to rate cuts to avoid economic imbalances.

💡Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In the video, inflation is a key concern for the Bank of Canada, with the script highlighting a recent drop in inflation to the bank's target rate of 2%, which influences the bank's decision to potentially cut interest rates.

💡GDP

Gross Domestic Product (GDP) measures the economic output of a country. The video script mentions that GDP stalling was one of the factors that prompted the Bank of Canada to consider rate cuts, as it indicates a slowdown in economic growth.

💡Unemployment

Unemployment refers to the number of people in the labor force who are without jobs and actively seeking work. The video discusses rising unemployment as a sign of economic weakness, which was a factor leading the Bank of Canada to consider rate cuts to stimulate job creation.

💡Productivity

Productivity measures the efficiency of production in an economy, often expressed as the ratio of output to inputs used. The script notes that productivity is at an all-time low, which could be a reason for the Bank of Canada to consider rate cuts to boost economic efficiency.

💡Monetary Policy

Monetary policy refers to the actions of a central bank, such as the Bank of Canada, intended to influence economic activity, especially with regard to stabilizing the currency and ensuring economic growth. The video discusses how the Bank of Canada's monetary policy decisions, particularly around interest rates, are influenced by various economic indicators.

💡US Federal Reserve

The US Federal Reserve is the central banking system of the United States, responsible for setting monetary policy in the country. The video script discusses how the Federal Reserve's decision to cut interest rates could influence the Bank of Canada's own rate decisions, highlighting the interconnectedness of global economies.

💡Exchange Rate

The exchange rate is the value of one country's currency in terms of another's. In the video, the exchange rate is mentioned in the context of how changes in interest rates can affect the Canadian dollar's strength relative to the US dollar, which in turn impacts the cost of imports and inflation.

💡Recession

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months. The video script suggests that the Bank of Canada is concerned about the potential for a recession, as indicated by slowing GDP and rising unemployment, which is a factor in their consideration of interest rate cuts.

💡Neutral Rate

The neutral rate is the interest rate that neither stimulates nor restricts economic growth. The video discusses how the Bank of Canada might be aiming to reach a neutral rate through its interest rate cuts, which could be lower than initially expected, to support economic growth without fueling inflation.

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