Key points:
- The Bank of Canada is likely not going to raise interest rates again this cycle.
- Inflation is trending in the right direction, and we experienced deflation in September.
- Employment levels have gone soft in Canada.
- The economy is signaling a looming downturn and recession.
Canadian interest rates
This video discusses why I think the Bank of Canada has finished raising rates. Inflation, employment, and the economy all point to the end of rate hikes for this cycle.
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:00] Rate forecasts can change very quickly. A little over a month ago, the implied probability of an increase to the Bank of Canada prime rate by a quarter of a percent in Q1 of 2024 was 87%. Today, that probability has dropped to a 40% chance of a quarter percent decrease to the Bank of Canada rate early in 2024. In this video, I’m going to give you the three reasons why we’ve likely seen the last interest rate hike of this cycle, and why the next move of the Bank of Canada is likely to be a cut.
Reason one: inflation
Chris: [00:00:41] We cannot talk about mortgage interest rates without talking about inflation, and inflation has been finally trending in the right direction for the month of September. The annualized inflation rate decreased from 4% to 3.8, and even though the drop doesn’t seem all that significant, the drop was actually unexpected. We actually expected to see an increase to inflation, but instead we saw a decrease. When we look at the month over month changes in inflation, we can see for the month of September that we actually had negative inflation. And said another way, negative inflation is actually deflation. And that is a big plus in the fight against inflation. Lastly, let’s give a quick peek to core inflation, which is the Bank of Canada’s preferred measure for reading inflation, which strips away the more volatile items such as gasoline prices. And we can see that core inflation is trending in the right direction, which is also going to give some confidence to the Bank of Canada.
Reason two: soft employment
Chris: [00:01:46] The second reason we think mortgage interest rates are going to start falling in 2024 is because employment has gone soft. On the surface, job creation looks pretty good in Canada. In this month of September, we created 63,000 new jobs. But like all things, we have to look a little bit deeper under the hood to understand what’s really happening. Of those 63,000 new jobs that were created in the month of September, only 15,000 of them were full time jobs. And in fact, if we look back over the last six months, going from March 2023 to September 2023, full time job creation has only increased by 139,000 new jobs, said another way, that’s approximately 23,200 new full time jobs per month over the last six months. Now, it might not be easy to wrap your head around the significance of 23,000 new full time jobs, but consider the following. This is Statscan’s website, and it was highly publicized earlier this year that Canada’s population exceeded 40 million. Furthermore, the population change increased by 2.9% year over year from July 2021 to July of 2022. So, and the vast majority of that increase was, let’s see here, close to 98% of the growth in the Canadian population came from net international migration. So these are newcomers to the country. And that represents a number of approximately 1.1 million. Now, not all 1.1 million people need full time work. Many are students. Some are under working age, some are older, more elderly. But the vast majority of them are, of course, here to seek a better life, which involves having work. And if you if you break down monthly 1.1 million, that’s approximately 92,000 new people per month in Canada. And we’re only creating about 24,000 new jobs. So you can see this disconnect between the number of people seeking jobs and the people, the number of new jobs that are, in fact, being created.
Reason three: weakening GDP
Chris: [00:04:06] The third and final reason why we’ve likely seen the last of the rate hikes is because we have a weakening economy and a looming recession. You don’t have to look far to know that the Bank of Canada is aware of these softening economic conditions. Buried in their October press release that accompanied the interest rate decision. Right in the middle, there’s a paragraph that contains some pretty specific language that would have most concerned things, like dampening economic activity, relieving price pressures. Consumption is subdued, soft demand, weaker demand. All these things are very negative and point to softening of the Canadian economy. And you can see evidence of this when we look at the recently released month over month GDP growth figures, which show basically for the last three months that the Canadian economy has not grown and in fact has contracted. And that’s very shocking when you consider that we have welcomed those 1.1 million newcomers to Canada. That should have an effect on GDP because they’re consuming as they arrive, and that’s having zero effect. So this doesn’t look very good for the Canadian economy.
Chris: [00:05:28] When you consider these three factors of inflation, employment and weakening GDP, it’s easy to see how the narrative for interest rates and the outlook or forecast for interest rates into 2024 is certainly not one of increases, but decreases. And the only question right now is when will those cuts need to come? And how severe is the economic impact of high interest rates going to weigh down on the Canadian economy?
Need more help or information?
Chris: [00:05:59] My name is Chris Molder. I’m a Toronto mortgage broker. If you found any value in today’s video, please consider liking, subscribing. Until next time. Bye for now.
If you’d like to discuss your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.
