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Bank of Canada held its target for the overnight rate at 5%

So, the Bank of Canada held its target for the overnight rate at 5%, and continued its policy of quantitative tightening​​. This move was widely anticipated, as market conditions and economic forecasts had pointed towards a rate hold. Economists and markets had been predicting this third straight rate hold, shifting focus from the possibility of further rate hikes to the timing of the Bank’s first rate cut​​.

But the Bank of Canada still continues with its messaging and warning to us that if Inflation doesn’t continue to behave and drop it is prepared to increase the rate again. That said, there are lots of reasons that economists don’t think the bank will increase its rate any further.

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Canada’s GDP Slumps

With Canada’s economic growth stalling in the middle quarters of this year, 2023, and real GDP contracting, higher interest rates are restraining spending. This, combined with a slow in the economy, is reducing inflationary pressures, with CPI inflation easing to 3.1% in October​​.

A discussion is brewing in the economic community about the future trajectory of interest rates. Renowned economist David Rosenberg anticipates that the Bank of Canada will need to cut its policy rate by 2 percentage points over the next 12 to 18 months, potentially starting as early as March or April of 2024​​. This is significant considering the upcoming wave of mortgage renewals and the financial strain it could put on households​​. If too many mortgages renew at high interest rates, that pulls a significant amount of money from the economy, since it is going to mortgage payments instead, and would set us up for a long and hard recession. We can hope the Bank of Canada understands this and will proactively work to prevent that.

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Bond Yield and fixed rates trend downward.

Separate, but related, the 5-year Government of Canada bond yield has been trending downwards, leading to a decrease in fixed mortgage rates. In the spring, it hit a low point when a few banks in the US failed, but over the summer saw a steady climb. From the high point in October,  the bone yield has dropped about 1%. We will likely see lenders across the country start offering 5-year fixed-rate mortgages below 5% again for the first time since last spring​​. This is a great indicator as it suggests how mortgage rates might head over the coming months

Despite this, economists have a divided opinion about the likelihood of a recession in Canada, which further complicates the Bank of Canada’s decisions on interest rates​​. Economists from major financial institutions predict that the central bank will hold this rate for at least the next six months, with a majority expecting a reduction in the second quarter of 2024​​. 

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We Are Here For You

So, to recap, the Bank of Canada’s decision to maintain the policy rate at 5% is in line with market expectations and reflects the current economic conditions in Canada. However, with the easing of inflation and the downward trend in bond yields, there’s growing speculation about a potential decrease in interest rates in the near future.

As always, if you have any questions or want to discuss how these developments might affect your financial situation, feel free to reach out to me and my team.

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