Analysts Predict Relief on the Horizon for Canadian Homeowners with Interest Rate Update, But June 5 Not Guaranteed
A reduction in interest rates by the central bank is on the horizon to provide relief to Canadian homeowners concerned about mortgage payments, according to analysts. However, there is some disagreement on the timing of this rate cut.
The central bank’s overnight lending rate has remained at 5 percent since July of last year amidst consistent increases in the cost of living. Recent slowdowns in inflation have raised hopes among borrowers that the central bank may lower the interest rate as early as its upcoming meeting on June 5.
Some analysts argue that persistent complaints about the rising cost of living, including a 21.4 percent increase in food prices over the past three years, may cause the central bank to delay the interest rate cut. In this scenario, many predict that the rate cut will only occur at the regulator’s July meeting.
Charles St-Arnaud, chief economist at Alberta Central and former economist at the Bank of Canada, believes that regardless of whether the rate cut happens in June or July, the outlook will not be significantly impacted. He emphasizes that the number and pace of rate cuts in the coming year will be more crucial.
In an analysis shared on social media, St-Arnaud mentioned that the central bank’s decision not to cut rates in June would signify extreme caution rather than concerns about inflation risks. He suggested that a rate cut could be expected in July under such circumstances.
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Economist James Orlando from TD Bank disagrees on the timing of the rate cut and anticipates that the central bank will maintain the rate at 5 percent to ensure inflation slows to around 2 percent. Regardless, he suggests that homeowners may still experience some relief on June 5.
In an analysis for TD, Orlando wrote, “Even though we expect the current rate to be maintained, we are anticipating accompanying communication from the BoC that a rate cut will be coming soon.”
If the central bank keeps the interest rate at 5 percent in June, Orlando notes that homeowners could still feel relief if indications in accompanying statements suggest a cut is likely in July.
“Bond yields would come down, and fixed mortgage rates could start coming down, even before the BoC starts cutting that interest rate,” Orlando explained. “So, if the BoC signals that this rate cut is going to happen, Canadians looking for longer-term mortgage products could see some relief.”
Inflation on Target
Statistics Canada reported an annual inflation rate of 2.7 percent in April, down from 2.9 percent in March, within the Bank of Canada’s target range of one to three percent. While food price increases eased slightly to 1.4 percent in April, gas prices continued to rise, putting pressure on drivers with a 6.1 percent annual gain in April.
Economists stress that the rate-setters must consider economic growth, as lower interest rates can stimulate a sluggish economy, impacting job creation and overall quality of life measures.
A recent study by the Fraser Institute highlighted a 3 percent drop in Canada’s real GDP per person between April 2019 and the end of last year, the second-largest decline in 40 years.
RBC analysts Nathan Janzen and Abbey Xu outlined in an RBC outlook that population growth surpassing economic growth has led to a decline in GDP per person in Canada. This trend could influence the central bank to lower rates in June.
“The economic backdrop in Canada has continued to soften on a per-capita basis with unemployment drifting higher and wage pressures and inflation showing further signs of easing,” they noted. “We continue to expect the first rate cut from the Bank of Canada in June.”
