INFLATION RELIEF?

A Summary of the June 27, 2023 Report

The most recent Consumer Price Index (CPI) report came out today (June 27). This report is important as the Bank of Canada is closely monitoring the rate of inflation and uses, in part, these figures when determining whether to increase or hold their overnight lending rate.

Here are some key takeaways:

1. Inflation slowed overall to 3.4% year over year, compared to last month’s 4.4%. The Bank of Canada uses several core measures of inflation. Their preferred method is the 3-month core measure (vs the year over year mentioned above). The 3-month core measure has also dropped and is now sitting at 3.6%. While this is good news, there is more work to be done to bring inflation back to the Bank’s target of 2%.

2. Energy prices are the primary factor for the overall reduced inflation. Year over year, energy prices have declined by 12.4%. Prices spiked last spring and summer due to Russia’s invasion of Ukraine – we are now beginning to see prices stabilize.
   
   
3. Despite positive updates, there were areas of concern:
   – Food Prices have risen 9%. This is not shocking as it is something that we are all experiencing at the grocery store. Interestingly, the Competition Bureau has just released a report stating that Canada needs more grocery businesses and that the lack of competitiveness is a driving factor behind high prices. This report highlights policies that it recommends to boost competition. Unfortunately, this will take time and will not be an immediate change for consumers
   – The Mortgage Cost Index shows that housing inflation is increasing at a rapid pace. A 29.9% increase year over year is eye watering for many of us. Mortgage interest costs are the main culprit for this and I know that I am not the only one who feels this pain. Also adding to housing costs are increased rental payments.

Fixed Rate Update

Canadian Bond Yields have been increasing as of late. This does impact fixed rate offerings from lenders. As the yield spikes, so too do the rates that lenders will offer. At this time of this writing, bond yields have nearly caught up to the peak that we saw in the fall of 2022.

The next important report due is the Labour Force Survey which comes out July 07. If unemployment levels increase, there is a chance that the bond yields will not pass the previous high of last fall. 

Will the Prime Rate Increase?

The big question on everyone’s minds is whether or not the Bank of Canada will increase its overnight lending rate at its next meeting (July 12). As it stands, economists are saying that there is a 57% chance of an increase. Short answer is that no one truly knows and these decisions are heavily based on the economic reports as they come out.

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June 07, 2023

Bank of Canada – Will They Continue to Raise Rates?

All Canadian mortgage holders have been holding our collective breaths during each of the Bank of Canada’s interest rate announcements. The BOC has made it clear today that we are not out of the woods yet. With a 0.25% increase to its overnight lending rate, we will see the Prime Rate move up to 6.95%. The last time that we have seen rates at this level was in 2007.

This rate hike today affects variable or adjustable rate mortgages, as well as secured or unsecured lines of credit. 

Will the BOC continue to raise rates? This is a toss-up and there is no clear answer. The main reason for the BOC’s decision today is the surprising strength and resilience in the Canadian housing market. The most recent data shows that the housing market is gaining strength despite the rise in rates. In the BOC’s eyes, if the most rate-vulnerable sector is still growing, more rate hikes are needed. Last month showed a slight uptick in overall inflation and there are hints that the 2nd quarter of Canada’s economy may also be in excess. That being said, many Economists do not believe that the way back to 2% inflation will be a steady drop – some upticks were expected. 

Canadian households are much more interest rate sensitive in comparison to our neighbors in the US. With our shorter term mortgages, households with renewals coming up in the next 2-3 years will most likely see increased rates. With this rate increase today, the Canadian Government 5 year bond yields have increased sharply – we are expecting all lenders to issue increases to their fixed rate offerings in the next day or so.

IMPORTANT DATES COMING UP:

June 09 – Canadian Employment Data

June 13 – US CPI Data for May 2023

June 14 – US Federal Rate Announcement

June 27 – Canadian CPI Data for May 2023

Click below to read the most recent announcement straight from the Bank of Canada:

June 07 2023 Rate Announcement

I will leave you with an excerpt from the BOC Announcement:

“The Bank continues to expect CPI inflation to ease to around 3% in the summer…However, with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.”

Only time will tell, but Canadians are more than ready for inflation and higher rates to ease.