Key points from the January 2024 Bank of Canada announcement:
- The BOC announced a fourth consecutive hold to the policy rate.
- The overnight lending rate remains unchanged at 5.00%.
- Inflation still keeping the BoC cautious about indicating when the first rate drop will be in 2024.
- The retail prime rate (what you and I pay) remains at 7.20%.
- Fixed rate mortgages have dropped ~0.50% to 0.90% depending on the term and type of fixed.
You can find the full press release here.
Bank of Canada holds policy rate unchanged to start 2024.
The BoC started their policy announcements in 2024 the same way then ended them in 2023… with a 4th consecutive hold to the policy rate.
Today’s announcement was unanimously expected by the market. No surprises.
But that’s about all economists and observers are unanimous on. There is a divergence of opinions on what happens next.
How many & what magnitude of rate cuts we can expect in 2024 is up for debate.
The culprit for this divide? A surprise CPI reading for the month of December. (It’s worth noting that this is not a uniquely Canadian problem – inflation has accelerated globally) To be fair the BoC had warned that inflation would remain “sticky” and that markets were too optimistic about when we might see rate cuts.
While headline inflation matched expectations at 3.4%. All of the core inflation metrics surprised to the upside.
Prior to the December inflation numbers, markets were betting that the BoC would begin cutting in Q1 of 2024. That expectation has now been pushed back to Q2.
For the counter argument – we have seen some serious flashes of weakness in the Canadian economy.
The Canadian economy created 100 net new jobs in December – oh and they were part-time jobs. Consumer spending is also showing clear signs that higher rates and concerns about affordability are weighing on consumers.
A recent Pollara poll showed that 82% of Canadians believe the country is in recession (technically it isn’t… yet). 53% expect Canada’s economy to worsen and only 15% expect it to improve.
RATE FORECAST
The expectation is still overwhelmingly lower rates in 2024.
In light of the sticky like honey inflation numbers I’m coming around to the view that we are not likely to see a rate cut at the next two BoC meetings on March 6th or April 10th. That is likely off the table. I don’t think the BoC is in any rush to start cutting rates and will keep their powder dry for as long as possible. June 5th starts looking interesting if the trend on inflation reverses and we remain firmly under 3.00% on both headline & core inflation.
Fixed rates are priced not by the BoC but relative to bond yields. Bond yields are forward looking anticipating where the BoC will be. Since December we’ve seen fixed rate mortgages drop 0.50% to 0.90% depending on the term and product. I expect them to stay relatively flat for the next month until we see some more solid evidence that inflation is trending back down.
The expectation of the market is still that we will see a prime rate 1.00% to 1.25% lower than it is today.
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