The Bank carries out monetary policy by influencing short-term interest rates to stimulate or slow the economy down. It does this by adjusting the target for the overnight rate on eight fixed dates each year.
SO WHAT? WHY SHOULD YOU CARE ABOUT THIS ANNOUNCEMENT?
Well, I’m going to tell you what you need to hear, not what you want to hear.
“The Headline Inflation Rate is Now Above the United States for the first time since the pre-pandemic days.”
Here are the facts. Inflation is still not where it needs to be. In fact, inflation sucks right now.
You’re likely aware that Canada’s annualized inflation rate surged from 2.8% in June to 3.3% in July. But this is to be expected, and if I’m being absolutely honest, I was shocked that we saw this number decrease in June. While consumer spending continued to be strong and defied expectations earlier in the year it finally looks like its capacity to sustain overall economic growth is running out. The pool of savings that kept many Canadians afloat has run dry and with so many already living off of credit for the last 6 months to a year, we’re quickly seeing the dangers of this band-aid method.
Consumer activity is also being drained by higher borrowing rates which are steadily working their way through the system as mortgage terms get renewed. Many Canadians who are labouring under significant debt levels will have to contend with interest rates remaining at a multi-decade high due to sticky inflation and bond market conditions.
We’re not there yet. We’re not at that 2% mark that the Bank of Canada is pushing for.
Let’s stop and think about July. Everything goes up in price because it’s summer season and providers can do that: gasoline and oil prices, the cost of hotel rooms, the cost of flights, and so on. Everything’s expensive, right? But you need to keep a couple of things in mind.
You need to keep in mind that it takes at least 18 months to see and feel the true impact of significant rate increases over this period. Also, I hate to say it, but so many factors contribute to this. When we’re talking about the headline inflation rate, mortgage interest costs were one of the largest contributors to that inflation, jumping by a record 30.6% on a yearly basis. If our mortgage costs are the largest factor right now in increasing this rate, and we just keep increasing mortgage costs as a result, then we’re stuck in a bit of a feedback loop.
Most homeowners either have mortgages with fixed rates for one to five years, or variable-rate mortgages that reset with every move in the central bank rate. In the industry, we’re seeing lots of homeowners now struggling to pay their monthly mortgage payments, and, in some cases, being forced to sell their houses. Data from Canada’s largest banks show that a growing number of homeowners are choosing to extend their mortgage amortization periods to cope with mounting costs. With no sign of an immediate rate cut in sight, anxious homeowners are now struggling to pay their monthly mortgage payments, and in some cases being forced to sell their houses.
Nearly all provinces (9/10, with British Columbia being the exception) also saw increases in the income needed to purchase an average-priced home. Prospective home buyers will see little relief on the affordability front until the central bank lowers rates, so Canadian homes aren’t likely to become anywhere near affordable for the foreseeable future.
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*Don’t forget the next announcement will be on OCTOBER 25TH 2023. The Quarterly Monetary Policy Report will also be released on this date.