Interest Rate Forecast: Will Interest Rates Continue to Fall in Canada?
It seems like just yesterday that the phrase "higher for longer" dominated economic discussions. However, ever since June 4, 2024, talks of lowering interest rates have been the focus of most mortgage news.
Headline inflation came in at just 2.67%, marking its lowest point in over three years. (Most media outlets round this figure to 2.70%). That made the decrease announced by the Bank of Canada on July 24, 2024 somewhat expected.
As economist David Rosenberg said, "When you exclude mortgage interest costs (which arguably shouldn't be in the CPI), inflation in Canada is running at +1.9%."
With the Bank of Canada preparing to decrease rates further, the pressing question is: what should your mortgage strategy be after July 2024?
Will Interest Rates Continue to Decline?
When trying to predict interest rate trends, there are a number of other factors that help economists forecast. You can also consider these factors when it comes to mortgage rates and whether it’s the right time to take out a mortgage or refinance.
Inflation Decline
July 16th’s headline inflation of 2.67% year-over-year is the slowest rate in over three years, and it’s been decreasing over time. The average core inflation has followed a consistent downward trend since peaking in June 2022 and inflation expectations have plummeted, as shown in Bank of Canada surveys.
Market Expectations
Markets now anticipate an additional 200 basis points of Bank of Canada cuts (up from 175 basis points last week).
Unemployment Trends
Unemployment is on the rise, a typical pattern in this type of economic environment.
Bank of Canada Hints
The Bank of Canada has indicated "several" more rate cuts are on the horizon, giving the hint that more rate decreases can be expected.
Key Indicators
Three out of four key indicators (excess supply, inflation expectations, and corporate pricing behaviour) are trending positively. Wage growth is the exception, but it’s typically a lagging indicator.
Renewal Rates
Despite the Bank of Canada's estimated midpoint neutral rate of 2.75%, the current policy rate stands a significant 200 basis points higher. Renewals at these elevated rates are happening rapidly, which is putting a strain on discretionary income.
Inflation Trends
Inflation trends typically exhibit a degree of symmetry in their rise and fall. Core inflation could be nearing the Bank of Canada's 2% target within a few months, as opposed to hovering around 3%.
Future Trends
Given these factors, the Bank of Canada should not be overly concerned with last month's disappointing CPI figures.
Regarding last month's inflation surprise, some commentary suggested that May's higher-than-expected 2.9% reading was due to changes in basket weights, implying it shouldn't have been a surprise.
Additionally, May's inflation came in 30 basis points above the 2.6% consensus forecast, and many Bay Street economists had already accounted for the basket changes in their estimates.
Moreover, bond yields surged by 7 basis points on that CPI release day, a day with minimal other news. This alone indicates that the market, which factors in all available information, was indeed caught off guard by the 2.9% print on June 25.
Economist David Rosenberg described the May CPI increase as "an aberration, pure and simple."
Will the Bank of Canada Continue to Lower Rates in 2024?
By the close of the market on Tuesday, expectations were set for two to three more rate cuts before the end of 2024. However, considering some valid, less dovish points raised in Derek Holt's recent report, it seems more likely we will see two—not three—more cuts this year.
Historically, rate-cut cycles in the inflation-targeting era begin with an average of 100 basis points of easing within the first 3.2 months. If this pattern holds, we could see a prime rate around +/- 6.20% by Christmas.
"We've been arguing for some time that Canada's widespread inflation problem has largely been resolved and is now confined to the shelter component," the National Bank wrote on July 16, 2024. It will take several months for this component to unwind.
For savvy, risk-embracing borrowers who trust the forward curve—which is generally justifiable–opting for floating rates is the way to go.
Factors to Consider for Your Next Mortgage
For those considering taking out a mortgage or refinancing, opting for a variable rate mortgage can be a strategic move if you know what to look for. Here are some key features that can stack the odds in your favour:
Competitive Rate: Aim for a rate that is prime minus 1.00% or better.
Standard Prepayment Charge: Look for a standard 3-month prepayment charge, which can offer more flexibility if you decide to pay off your mortgage early.
Flexible Porting: Seek out full flexible porting options, which are rare but valuable, allowing you to transfer your mortgage to a new property without penalties.
Flexible Refinancing: Ensure the mortgage allows for flexible refinancing, meaning you can borrow additional funds without incurring penalties.
Line of Credit: Consider a mortgage that includes a line of credit for added liquidity and financial flexibility.
Semi-Annual Compounding: Opt for semi-annual compounding to reduce your overall interest load.
Variable-to-Fixed Conversions: Look for favourable rates on converting from a variable to a fixed rate, which can be useful if your financial situation or market conditions change.
By prioritizing these features, you can maximize the benefits of a variable rate mortgage and better manage your financial future.
Should You Take Out a Mortgage or Refinance Now?
Timing the market perfectly is almost impossible. However, you can make the best decision possible with the right advice.
The mortgage experts at Spire Mortgage take the time to understand your needs, so they can give you the best advice. For answers to all of your mortgage questions, contact Spire Mortgage.
