Mortgage Rates

Weekly Mortgage Digest: Bank of Canada raises concerns over economic risks as inflation nears target

September 24, 2024

The Bank of Canada’s recently released summary of deliberations from its July 24 monetary policy meeting reveals a growing concern about downside risks to inflation.

While inflationary pressures are continuing to ease—as of August, headline CPI inflation reached the central bank’s target rate of 2%—the Governing Council noted that weak economic activity could push inflation below its target if not carefully managed.

The meeting summary indicates that some Governing Council members believe the risks are balanced, with strong shelter and services price inflation countering the downward pressure from excess supply in the economy.

However, others are increasingly concerned about the downside risks to inflation, particularly if economic activity and the labor market weaken further.

Weak household spending, soft residential investment, and a slackening labour market are placing downward pressure on inflation. Some members are particularly worried that economic activity and labour market conditions may not improve as expected. If businesses delay hiring or investment due to low demand, inflation could drop faster than the Bank is aiming for.

As a result, the Bank decided reduced its policy rate by 25 basis points on July 24 4.25%, acknowledging that future rate cuts are likely necessary, but they emphasized that there’s no set path ahead.

“Governing Council members…agreed that if inflation continued to ease as expected, that it was reasonable to expect that the policy rate would decline further,” the summary reads. Indeed, inflation did continue to fall in August as noted above, which supports growing market expectations for two additional rate cuts at the Bank’s remaining meetings this year.

There is also speculation that one of these cuts could be more aggressive, potentially a 50-basis-point reduction, depending on the evolving economic outlook and the severity of the downside risks.

The Bank of Canada discussed two possible scenarios for the economy. In one, lower interest rates could “spur economic activity and the economy could rebound faster than anticipated” in late 2024 and into 2025. This could lead to a stronger housing market, higher shelter price inflation, and sustained wage growth, which might require the Bank to “slow the pace” of future rate cuts.

In the second scenario, the economy and labour market may “not pick up as anticipated” or could weaken further if consumer spending and residential investment remain sluggish. In this case, the Bank could be forced to lower interest rates more quickly to offset the downturn.

New mortgage rules to lead to “firmer” housing market conditions: BMO

The federal government’s latest mortgage rule changes announced last week are likely to “incrementally bolster demand” for housing, according to a report from BMO.

While some of the changes relating to extending mortgage amortizations to 30 years for new-build purchases may not have a huge impact, BMO says other changes will make a difference.

For example, raising the mortgage insurance cap purchase price from $1 million to $1.5 million will “open up” the single-family home segment to more buyers, and extending the amortization period from 25 to 30 years will increase purchasing power by about 10%, similar to cutting mortgage rates by 0.90%. “…this is additional easing for the market overall, and serious juice for the $1 mln-to-$1.5 mln segment,” wrote BMO senior economist Robert Kavcic.

The housing market is also expected to benefit from falling fixed mortgage rates, which continue to drop by the week. “All told, mortgage rule tweaks will encourage already-levered households to borrow more, for longer—a curious policy move for a market that has landed as well as anyone could have hoped for,” Kavcic added. “In fact, assuming the economy holds its ground, the BoC easing cycle and market fundamentals could on their own set housing up for noticeably stronger conditions through next year.”

Mortgage snippets

Mortgage credit “calm before the storm”? Annual mortgage growth in Canada was “amazingly stable” at just below 3.5%, BMO said of the latest credit stats.
“Rare has been the day that growth has been both this calm—it has been locked in a range just below 4% for two years now—and this mild—it hasn’t been this slow in more than two decades,” wrote BMO economist Douglas Porter.

But that could change in 2025 thanks to a combination of falling interest rates and new mortgage rules announced last week that could “firm” the housing market, “in turn juicing mortgage growth,” he added. “At this point, we’re not expecting a big run-up in mortgage balances in 2025, but they do seem poised to turn higher.”
Rise in retail sales in July: Retail sales rose 0.9% in July, reaching $66.4 billion, according to Statistics Canada. Sales increased in seven of nine sub-sectors, with motor vehicle and parts dealers leading the gains. Alberta (+2.0%) and Quebec (+1.5%) led provincial growth.
TD economist Maria Solovieva noted that while the increase is positive, it’s unlikely to strongly influence the Bank of Canada’s rate decision in October, given the overall decline in retail spending per capita. StatCan’s early estimate for August suggests a 0.5% rise in retail sales, with official data to be confirmed on October 25.
National new home prices were flat in August: The New Housing Price Index (NHPI) showed that prices for new homes remained flat in 13 of the 27 census metropolitan areas (CMAs), while eight CMAs saw price increases and six experienced declines.
The largest monthly decreases were recorded in Calgary (-0.4%) and St. Catharines–Niagara (-0.3%), while Regina (+0.3%) and Oshawa (+0.2%) posted the highest increases. Year-over-year, national new home prices remained unchanged, following a slight 0.1% increase in July. The biggest annual increases were seen in Calgary (+4.1%), Trois-Rivières (+3.1%), and Edmonton (+2.1%), while Kitchener–Cambridge–Waterloo and Ottawa saw the steepest declines (-2.8% each), followed by Sherbrooke (-1.7%).

TD CEO to step down: TD Bank has announced that CEO Bharat Masrani is set to retire on April 10, 2025, closing out nearly a decade of leadership. Raymond Chun, currently head of Canadian banking, will take over as the new CEO.
TD has recently been involved in a U.S. money laundering scandal, forcing it to set aside US$3 billion for potential penalties. As part of a transition plan, Chun will become chief operating officer on Nov. 1 before taking over the top job when Masrani steps down at the bank’s annual meeting next year.