Bank of Canada reduces policy rate by 25 basis points to 4½%
The Bank of Canada on July 24th reduced its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is continuing its policy of balance sheet normalization.
The global economy is expected to continue expanding at an annual rate of about 3% through 2026. While inflation is still above central bank targets in most advanced economies, it is forecast to ease gradually. In the United States, the anticipated economic slowdown is materializing, with consumption growth moderating. US inflation looks to have resumed its downward path. In the euro area, growth is picking up following a weak 2023. China’s economy is growing modestly, with weak domestic demand partially offset by strong exports. Global financial conditions have eased, with lower bond yields, buoyant equity prices, and robust corporate debt issuance. The Canadian dollar has been relatively stable and oil prices are around the levels assumed in April’s Monetary Policy Report (MPR).
In Canada, economic growth likely picked up to about 1½% through the first half of this year. However, with robust population growth of about 3%, the economy’s potential output is still growing faster than GDP, which means excess supply has increased. Household spending, including both consumer purchases and housing, has been weak. There are signs of slack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work. Wage growth is showing some signs of moderating, but remains elevated.
GDP growth is forecast to increase in the second half of 2024 and through 2025. This reflects stronger exports and a recovery in household spending and business investment as borrowing costs ease. Residential investment is expected to grow robustly. With new government limits on admissions of non-permanent residents, population growth should slow in 2025.
Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.
CPI inflation moderated to 2.7% in June after increasing in May. Broad inflationary pressures are easing. The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm. Shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation. Inflation is also elevated in services that are closely affected by wages, such as restaurants and personal care.
The Bank’s preferred measures of core inflation are expected to slow to about 2½% in the second half of 2024 and ease gradually through 2025. The Bank expects CPI inflation to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices. As those effects wear off, CPI inflation may edge up again before settling around the 2% target next year.
With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.
Source: https://www.bankofcanada.ca/2024/07/fad-press-release-2024-07-24/
Three quarters of mortgage holders are anxious about renewal: Mortgage Professionals Canada survey
Mortgage consumers are increasingly anxious about their financial situation, particularly the prospect of renewing their mortgage at higher interest rates, according to Mortgage Professionals Canada’s Semi-Annual State of the Housing Market Report.
The survey found that three quarters (76%) of those facing renewal in the next 12 months report being anxious about their renewal, an increase of 10 percentage points since last year. Meanwhile, seven out of 10 Canadians (70%) say they are anxious about their family’s financial situation over the coming months, an increase of 17 percentage points from last year.
Concerns about affordability aren’t just limited to current homeowners. MPC’s survey reveals non-owners are more pessimistic than ever about their prospect of being able to purchase a home.
More than half of non-owners (51%) now believe they will never purchase a home, up from 18% two years ago. Just 16% of non-owners are currently planning to purchase a principal residence in the next 24 months, a drop of seven points from a year ago.
“Canadians are grappling with an unprecedented housing affordability crisis, exacerbated by ongoing high interest rates and economic uncertainty,” said Lauren van den Berg, President and CEO of MPC. “Our findings highlight the urgent need for policies that address these challenges and support both current and aspiring homeowners. We remain committed to advocating for measures that will make homeownership more accessible and sustainable for Canadians.”
MPC’s semi-annual report based on data collected from over 2,000 Canadians. The survey is conducted, and tabulated by partner firm Bond Brand Loyalty.
Consumers are increasingly pessimistic – highlights
- 55% are well-positioned to handle an increase in mortgage rates (-5 pts from 2022)
- 33% regret taking the size of mortgage that they did (+7 pts from 2022). Of those renewing in the next year, 43% regret taking on the size of mortgage that they did.
- 23% say a small increase in rate will cause them trouble making payments
- 9% say they are currently having trouble making payments (vs. 6% in 2022)
Canadians remain positive toward real estate
Despite elevated anxiety caused by higher interest rates and an uncertain economic backdrop, Canadians continue to view real estate as a good long-term investment. Roughly eight in 10 respondents view real estate as a good long-term investment, up seven points from last year.
Another 77% classify a mortgage as “good debt,” up from 68% last year, and more than half of Canadians (52%) are positive about Canada’s economy over the next 12 months (+8 pts).
“Despite the current challenges, Canadians’ confidence in real estate as a sound long-term investment remains strong,” said Joe Jacobs, Chair of MPC’s board of directors. “This enduring belief underscores the importance of working with a mortgage professional. Our expert and objective advice helps cut through the noise so that we can help you find the solution that’s right for you, especially during this environment of economic uncertainty.”
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