Today, the tone was much more optimistic, suggesting that policymakers are increasingly confident interest rates are restrictive enough to bring inflation back to the 2% target. Still, Bank officials want to see more progress on core inflation before it begins to ease. It said, 'The Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.'
The central bank focuses on 'the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour' and remains resolute in restoring price stability.
OFSI (Office of the Superintendent of Financial Institutions) continues to comment how they do not like variable mortgages with fixed rate guarantee mortgages, which have borrowers who have stretched out their amortizations to the max and in some cases have not even covered the interest portion with their payment. So they have raised the capital requirement of the banks on some of those banks who have the highest amortizations, trying to discourage lenders to allow these types of loans. 17% of all mortgages are Variable and 12.4% of those mortgages are above a 35 year amortization signally a major sticker shock once their term is up and the re-calculate the max amortization of 30 years. No word has been mentioned on removing this product and is likely to stay around for the long term. Arrears on mortgages are only up very slightly from a low of 0.14% to 0.16% in 2023 but much more prevalent in the private sector with much higher rates and less strict regulation. Interesting to note, that arrears are highest in the Praries where the amount of loans are the lowest and the lowest in BC and Ontario where the mortgages are the highest.
Currently we are at the same pace as 1970 in housing starts which clearly dicatates a major issue with the amount of immigration happening in Canada. 900k single family homes and 400k apartments in 2023. 37% of Canadians are renters. The Government needs to incentivize more developers to build Canadians affordable housing! This equates to why rents are rising in Canada, as well as interest rates sky rocketting since Jan 2022.
We have a new Immigration Minister, Marc Miller in the Government but zero changes to policy. Planned numbers estimated by the government state 485k new immigrants in 2024, 500k in both 2025 and 2026 which could be even higher depending on what the new minister does. The one thing they have done is told us they are reducing the amount of International students down to 364k for 2 years, where we saw upwards of 1 million International students in 2023. More than 800k temporary workers were allowed into Canada in 2023 which is a major part of the immigration policy.
Bottom Line
This was a more upbeat Bank of Canada statement. There is a good chance that monetary tightening has done its job, and inflation will trend downward in the coming months. As we have seen, the road to 2% inflation is bumpy, but we are heading there probably sooner than the Bank expects. As predicted, they are staying the course for now, but multiple rate cuts are likely this year. The scheduled dates for announcing the policy rate are March 6, April 10, June 5 and July 24. The Bank of Canada will begin cutting the overnight rate somewhere in there.
For now, my bet is on the June meeting, but if I'm wrong, it will likely be sooner rather than later. Once they begin to take rates down, they will do so gradually, 25 basis points at a time, and over a series of meetings. We could well see rates fall by 100-to-150 bps this year. Risks to the outlook remain, as always.
I do not expect the overnight policy rate to fall as low as the pre-Covid level of 1.75% this cycle. Inflation averaged less than 2% in the five years before COVID-19, depressed by increasing globalization and technological advances. Those forces are now reversed. |
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