As Canadians eagerly await the Bank of Canada’s upcoming interest rate announcement on June 5, 2024, many are wondering if they will finally see some relief in the form of lower borrowing costs. The central bank’s decision will have far-reaching implications for homeowners, potential buyers, and the overall economy. In this article, we will explore the factors influencing the Bank of Canada’s decision, the arguments for and against a rate cut, and the potential outcomes for Canadians.
Factors Influencing the Bank of Canada’s Decision
The Bank of Canada’s interest rate decisions are based on a complex interplay of economic indicators, both domestic and global. The key factors the central bank considers include:
- Inflation rates: The Bank of Canada aims to keep inflation around 2%. Currently, core inflation measures are below this target, and total inflation stands at 2.7%, or below 2% when excluding mortgage-interest costs. According to Bank of Canada Governor Tiff Macklem, the central bank is seeing “renewed downward momentum in underlying inflation.”
- GDP growth: Canada’s GDP per capita has been falling for seven consecutive quarters, a significant indicator of economic slowdown. Macklem acknowledged that economic growth has stalled.
- Employment rates: The labour market is showing signs of cooling, with rising unemployment rates and moderating wage growth. Macklem noted that the labour market has cooled “from very overheated levels.”
- Global economic trends: The Bank of Canada also takes into account global economic conditions and the actions of other central banks, particularly the U.S. Federal Reserve. Macklem expressed concerns about the potential impact of a rate cut on the Canadian dollar if it deviates significantly from the Federal Reserve’s path.
The Case for a Rate Cut in June
Proponents of a rate cut argue that the current economic conditions warrant a reduction in the overnight lending rate. Deputy Chief Economist at National Bank Financial, Matthieu Arseneau, believes that Canada’s inflation problem has been largely solved and that the Bank of Canada may have kept monetary policy too restrictive for too long, potentially inflicting unnecessary damage on the economy.
Furthermore, the time lag between monetary policy changes and their impact on the economy suggests that the current high-interest rates may continue to put pressure on households, particularly those with mortgage debt, for some time. Arseneau warned that “every quarter, new cohorts are being hit by interest rate hikes due to mortgage renewals.”
Governor Macklem acknowledged that higher rates have been hard on Canadians and some sectors of the economy, like real estate. He stated that the Bank doesn’t “want to keep monetary policy this restrictive for longer than we have to.”
Arguments Against a Rate Cut in June
On the other hand, some experts believe that the Bank of Canada may hold off on a rate cut in June, waiting for clearer signals from the U.S. Federal Reserve. A significant gap between the Bank of Canada and Federal Reserve rates could lead to a depreciation of the Canadian dollar, which the central bank may want to avoid.
Additionally, while the Canadian and U.S. economies share many similarities, there are notable differences in their labour markets and mortgage market structures. These differences may influence the Bank of Canada’s decision to deviate from the Federal Reserve’s path.
Macklem also expressed concerns about borrowers expecting a return to the record-low rates seen during the pandemic era, stating that “interest rates are certainly not going to the emergency low levels we had during COVID. They’re unlikely to even get back to the pre-COVID levels.”
Potential Outcomes and Their Impact on Canadians
| Scenario | Impact on Variable Rate Mortgages | Impact on Fixed Rate Mortgages |
|---|---|---|
| Rate hold in June | No immediate relief | Potential decline in fixed rates if a future cut is signaled |
| Rate cut in June or July | More payments going towards principal, potentially faster mortgage payoff | Challenges when renewing mortgages, as rates may be higher than pandemic-era lows |
Scenario 1: Rate hold in June
If the Bank of Canada decides to hold rates steady in June, variable rate mortgage holders will not see immediate relief. However, if the central bank signals that a rate cut is on the horizon, fixed mortgage rates could start to decline, benefiting those looking to secure a longer-term mortgage.
According to TD Economist James Orlando, even if the Bank of Canada holds rates in June, the accompanying communication could bolster confidence that a lower rate is coming in July. “We’re looking for some signal from the BoC to help bolster confidence that a lower rate could be coming in July,” Orlando said.
Scenario 2: Rate cut in June or July
In the event of a rate cut in June or July, variable rate mortgage holders will see more of their payments going towards the principal, potentially allowing them to pay off their mortgages faster than in a higher rate environment.
Fixed rate mortgage holders may face challenges when renewing their mortgages, as rates are likely to be higher than they were during the pandemic-era lows. Natasha Struminikovski, Associate Vice President, Product Group Owner, Homeowners Journey at TD, advised that “if someone has a mortgage that is coming up for renewal, it’s an important time for them to take stock of where they are financially and understand their mortgage options.”
Experts advise homeowners and potential homebuyers to assess their financial situations carefully and explore their options with the help of professionals, such as mortgage specialists, to navigate the changing interest rate landscape.
Expert Opinions and Predictions
Economists and industry professionals have weighed in on the likelihood of a rate cut in June. While Matthieu Arseneau believes the conditions are ripe for a rate cut, TD Economist James Orlando predicts that the Bank of Canada will hold rates steady in June but may signal a cut in July.
Governor Macklem acknowledged that the Bank of Canada is “getting closer” to cutting interest rates, stating, “We do see renewed downward momentum in underlying inflation. The message to Canadians is, we are getting closer. We are seeing what we need to see and we just need to be confident that it will be sustained.”
However, Macklem also warned that when the Bank does start reducing rates, “it’s likely to be a pretty gradual path.” He cautioned that “Canadians should not be expecting a rapid decline in interest rates.”
Conclusion
As the Bank of Canada’s June interest rate announcement approaches, Canadians are eagerly awaiting the decision and its potential impact on their financial lives. While the case for a rate cut is strong, given the current economic indicators, the central bank must also consider global economic trends and the actions of other central banks.
Regardless of the outcome, it is essential for Canadians to stay informed about the factors influencing interest rates and to be prepared for potential changes. Seeking professional advice and exploring one’s options can help homeowners and potential buyers make informed decisions in the face of an evolving interest rate environment.
Frequently Asked Questions (FAQ)
- Q: When is the Bank of Canada’s next interest rate announcement? A: The Bank of Canada’s next interest rate announcement is scheduled for June 5, 2024.
- Q: What factors does the Bank of Canada consider when making interest rate decisions? A: The Bank of Canada considers various factors, including inflation rates, GDP growth, employment rates, and global economic trends, particularly the actions of the U.S. Federal Reserve.
- Q: What is the current inflation rate in Canada, and how does it compare to the Bank of Canada’s target? A: As of May 2024, the total inflation rate in Canada stands at 2.7%, or below 2% when excluding mortgage-interest costs. The Bank of Canada’s target for inflation is around 2%.
- Q: What are the arguments for a rate cut in June 2024? A: Proponents of a rate cut argue that the current economic conditions, such as low inflation, stalled GDP growth, and a cooling labour market, warrant a reduction in the overnight lending rate. They also cite concerns about the prolonged impact of high-interest rates on households with mortgage debt.
- Q: What are the arguments against a rate cut in June 2024? A: Some experts believe that the Bank of Canada may hold off on a rate cut in June, waiting for clearer signals from the U.S. Federal Reserve to avoid a significant gap between the two central banks’ rates, which could lead to a depreciation of the Canadian dollar.
- Q: How would a rate hold or rate cut impact variable rate mortgage holders? A: If the Bank of Canada holds rates steady in June, variable rate mortgage holders will not see immediate relief. However, if the central bank cuts rates in June or July, variable rate mortgage holders will see more of their payments going towards the principal, potentially allowing them to pay off their mortgages faster.
- Q: What should fixed rate mortgage holders expect if interest rates drop? A: Fixed rate mortgage holders may face challenges when renewing their mortgages, as rates are likely to be higher than they were during the pandemic-era lows. It is essential for them to assess their financial situation and explore their options with the help of professionals, such as mortgage specialists.
