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Economic Update
March 6, 2024
Today, the Bank of Canada announced its decision to maintain the overnight rate at 5%, marking the fifth consecutive period without change. Despite a drop in inflation to 2.9% in January and indications of a slowing economy, the Bank has opted to observe inflation trends over several months before considering any adjustments to interest rates. Governor Tiff Macklem emphasized the importance of giving higher rates more time to influence the economy, particularly in the context of persisting underlying inflationary pressures.
While there are predictions of a decrease in rates later this year, the Bank’s assessment suggests a cautious approach, focusing on sustained easing in core inflation before considering rate adjustments. Although headline inflation fell to 2.9% in January, economists caution that a more sustained downtrend is necessary before the Bank seriously considers rate cuts.
Despite a higher-than-expected GDP growth rate in the fourth quarter, economists note that the underlying details of the economy remain weak. Growth in the quarter was primarily driven by net exports, while domestic consumption and business investment continued to decline.
Looking ahead, the next Bank of Canada announcement is scheduled for April 10th. While there was only a 16% chance of a rate decrease today, there’s a more confident 96% chance of a rate reduction in June 2024.
In navigating this period of uncertainty, it’s important to explore your options carefully. Consideration of variable rates could capitalize on predicted future drops, while opting for a short-term fixed rate can provide payment stability.
The average prediction is that Bank of Canada will reduce rates by roughly by 1% in 2024, and another 1.2% in 2025. I am here to assist you in understanding the implications of these economic developments on your financial strategies. Please don’t hesitate to reach out to discuss your options and how we can navigate this period together.
Mortgage and Market Update
The liberal government released the Federal Budget for 2024 on April 16th, bringing forth changes that affect housing and mortgages:
- Extended Amortization Period: Effective August 1, first-time buyers purchasing
new-build properties with less than 20% can now extend their maximum
amortization period from 25 to 30 years.
- Enhanced Home Buyers’ Plan: Immediate changes allow first-time buyers to
withdraw up to $60,000 from their RRSP tax-free for home purchases, up from
$35,000. Additionally, the grace period for loan repayment is extended by three
years.
- Capital Gains Tax Adjustment: Starting June 25, 2024, the capital gains tax on
secondary property sales will rise from 50% to 66.7%. This means that individuals
selling secondary properties will now be subject to a higher tax rate on their
profits.
Inflation Update:
Canada’s annual inflation rate rose slightly to 2.9% in March, primarily due to higher gas prices. Gas prices surged by 4.5% year-over-year in March, while shelter prices and rent both increased by 6.5% and 8.5% year-over-year, respectively.
Mortgage rates:
- Variable-rate mortgage holders await a BoC rate cut, but fixed rates are rising. Government of Canada bond yields fell significantly from October to January but have since rebounded by about 60 basis points, driven by strong U.S. economic data. This has led to increases of 15 to 30 basis points in 2- to 5-year fixed mortgage rates. While markets expect the BoC to cut rates in June or July, rate experts predict further increases in fixed rates. Concerns about Canada’s fiscal policy could continue to push fixed rates higher, regardless of Bank of Canada actions.
