Mortgage Logic

Bank of Canada Stays Key Rate, but Addresses Near Future Easing

The Bank of Canada (BoC) today, at its regular scheduled announcement, decided to leave its Key Overnight Lending rate at 5.0%. BoC has observed that inflation has recently cooled off from its highs in 2023, (February core inflation being 2.8%), demonstrating that rising prices are coming under control. It still needs to see more of the same for a longer period before it considers easing its Key Rate, as the decline in inflation is very recent.

The following salient points are important to observe with today’s announcement:

  • BoC has forecasted that core inflation will be at 2.0% by mid-2025.  It has also been suggested that it is open to a rate cut in June 2024, subject to all of their studied data continuing to approach its targets.
  • Shelter costs – mortgage payments and rent are high and push inflation higher.
  • All other goods and services are much less inflationary now.
  • The economy’s supply side is not an issue such as it was when emerging from covid – this is disinflationary.
  • Wage growth has just started easing – this is disinflationary.
  • Productivity is down in Canada, but it is booming up in the US. This allows the US economy to expand while keeping a lid on inflation. Whereas lower productivity in Canada makes monetary easing (lowering the BoC rate) more imminent.

In summary, the costs of mortgages and money will come down over the next year, but not to the extent that we saw pre-covid. The normalizing of interest rates is finally beginning to happen – to create a more balanced world of investing and borrowing. Whereas the yield curve is inverted right now (shorter-term rates are higher than longer-term rates), we will see a gradual movement towards a normalized yield curve where longer-term rates will eclipse short-term rates, in fact, the 5-year rates may not change much from where they are now until much further on down the road.