The following is re-posted from the Bank of Canada website

The Bank of Canada today reduced its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is continuing its policy of balance sheet normalization.

The global economy is expected to continue expanding at an annual rate of about 3% through 2026. While inflation is still above central bank targets in most advanced economies, it is forecast to ease gradually. In the United States, the anticipated economic slowdown is materializing, with consumption growth moderating. US inflation looks to have resumed its downward path. In the euro area, growth is picking up following a weak 2023. China’s economy is growing modestly, with weak domestic demand partially offset by strong exports. Global financial conditions have eased, with lower bond yields, buoyant equity prices, and robust corporate debt issuance. The Canadian dollar has been relatively stable and oil prices are around the levels assumed in April’s Monetary Policy Report (MPR).

In Canada, economic growth likely picked up to about 1½% through the first half of this year. However, with robust population growth of about 3%, the economy’s potential output is still growing faster than GDP, which means excess supply has increased. Household spending, including both consumer purchases and housing, has been weak. There are signs of slack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work. Wage growth is showing some signs of moderating, but remains elevated.

GDP growth is forecast to increase in the second half of 2024 and through 2025. This reflects stronger exports and a recovery in household spending and business investment as borrowing costs ease. Residential investment is expected to grow robustly. With new government limits on admissions of non-permanent residents, population growth should slow in 2025.

Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.

CPI inflation moderated to 2.7% in June after increasing in May. Broad inflationary pressures are easing. The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm. Shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation. Inflation is also elevated in services that are closely affected by wages, such as restaurants and personal care.

The Bank’s preferred measures of core inflation are expected to slow to about 2½% in the second half of 2024 and ease gradually through 2025. The Bank expects CPI inflation to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices. As those effects wear off, CPI inflation may edge up again before settling around the 2% target next year.

With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is September 4, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on October 23, 2024.

 

Canada’s banking regulator is pushing back implementation of a rule change that could have significant implications for Canadian lenders, following consultation with domestic intuitions and global regulators.

Late last week, the Office of the Superintendent of Financial Institutions (OSFI) announced a one-year delay in implementing a higher global standard for lending risk as it waits for other countries to move forward with the change.

Some fear that the increase to the capital floor level for banks, in accordance with standards set out by the international Basel Committee on Banking Supervision, could result in lower lending volumes in Canada, along with higher fees and fewer options for consumers.

The capital floor level sets a minimum threshold for the amount of capital banks must hold relative to their risk-weighted assets, ensuring financial stability and reducing the risk of insolvency.

The delay comes after concerns were raised that Canada was moving forward with the change too quickly, putting its banks at a disadvantage while those same standards face resistance and delay south of the border.

Mortgage Professionals Canada (MPC) expressed concern that the change would have significant implications on the mortgage industry by limiting how domestic banks calculate loan risk.

“We commend OSFI’s prudent decision to delay the implementation of new capital floor levels for another year, preserving lenders’ flexibility in risk assessment,” said MPC’s President and CEO Lauren van den Berg. “MPC has strongly advocated for OSFI to proceed cautiously with significant changes affecting lenders and implement regulations that prioritize flexibility for the consumer rather than limit it with standardized models.”

Van den Berg says that while the standardization model could simplify things for regulators, it would impose limits on both lenders and consumers.

She explains that the global standard could make it harder for lenders to consider unique circumstances or alternative risk factors when making loan decisions. That, in turn, could make it harder for borrowers to qualify for loan products, increase borrowing costs, and limit their product options.

OSFI remains committed to reform

Though the changes have been pushed back by a year, the Group of Central Bank Governors and Heads of Supervision (GHOS) — which oversees the Basel Committee on Banking Supervision and which the Bank of Canada is a member — unanimously reaffirmed its commitment to implementing the reforms as soon as possible.

“The Basel III 2017 reforms will strengthen banks’ ability to withstand financial shocks and support economic growth while enabling them to compete and take reasonable risks,” said Peter Routledge, the Superintendent of Financial Institutions, in a press release. “Key to these reforms’ success is full, timely, and consistent adoption and implementation across BCBS jurisdictions so that competitive balance prevails throughout the international banking system.”

Routledge added that OSFI will implement the reforms with a focus on competitive balance in banking and the soundness of Canada’s capital regime.

The Basel III reforms include a set of measures developed in the wake of the 2008 financial crisis to protect the global economy from future crises, and were accepted by the international body’s members, including Canada, in 2017.

They are intended to ensure financial institutions adhere to a universal standard for balancing risk with adequate levels of capital and liquidity.

The capital floor imposes a universal approach to capital requirements, rather than allowing individual countries and institutions to set their own standards. With the delay, the 2025 capital floor will remain at the current 67.5% threshold, postponing the increase to 70%, originally scheduled for this year, until the 2026 fiscal year.

This article was written for Canadian Mortgage Trends by:

Early Signs Of Renewed Life In June Housing Markets

The Canadian Real Estate Association (CREA) announced today that national home sales rose 3.7% between May and June following the Bank of Canada’s rate cut. While activity was still muted, it wasn’t nearly as weak as the media recently portrayed.

“It wasn’t a ‘blow the doors off’ month by any means, but Canada’s housing numbers did perk up a bit on a month-over-month basis in June following the first Bank of Canada rate cut,” said Shaun Cathcart, CREA’s Senior Economist. “Year-over-year comparisons don’t look great mainly because of how many buyers were still jumping into the market last spring, but that’s a story about last year. What’s happening right now is that sales were up from May to June, market conditions tightened for the first time this year, and prices nationally ticked higher for the first time in 11 months”.

New Listings

The number of newly listed properties rose 1.5% last month, led by the Greater Toronto Area and British Columbia’s Lower Mainland. As of the end of June 2024, there were about 180,000 properties listed for sale on all Canadian MLS® Systems, up 26% from a year earlier but still below historical averages of around 200,000 for this time of the year.

As the national increase in new listings was smaller than the sales gain in June, the national sales-to-new listings ratio tightened to 53.9% compared to 52.8% in May. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

“The second half of 2024 is widely expected to see the beginnings of a slow and gradual return of buyers into the housing market,” said James Mabey, Chair of CREA. “Those buyers will face a considerably different shopping experience depending on where they are in Canada, from multiple offers in places like Calgary to the most inventory to choose from in over a decade in places like Toronto.

At the end of June 2024, there were 4.2 months of inventory nationwide, down from 4.3 months at the end of May. This was the first time that the number of months of inventory had fallen month over month in 2024. The long-term average is about five months of inventory.

Home Prices

The National Composite MLS® Home Price Index (HPI) increased by 0.1% from May to June. While a slight increase, it was noteworthy because it was the first month-over-month gain in 11 months. Regionally, prices are still generally sliding sideways across much of the country. The exceptions remain Calgary, Edmonton, and Saskatoon, and to a lesser extent Montreal and Quebec City, where prices have steadily increased since the beginning of last year.

That said, there have been more recent upward price movements in other markets, including across Ontario cottage country, Mississauga, Hamilton-Burlington, Kitchener-Waterloo, Cambridge, London-St. Thomas, and Halifax- Dartmouth.

The non-seasonally adjusted National Composite MLS® HPI stood 3.4% below June 2023. This mostly reflects how prices took off last April, May, June, and July – something that has not been repeated in 2024.

Bottom Line

Housing activity will gradually accelerate over the next year as interest rates continue to fall. Yesterday, bond yields fell considerably due to the marked improvement in the June US inflation data. Markets are now pricing in a 90% chance of a Federal Reserve rate cut in September, allaying fears that the Canadian dollar will decline precipitously if the Bank of Canada continues to go it alone in easing monetary conditions.

Next week’s CPI data will determine whether the Bank of Canada cuts rates at their July confab or waits until the September meeting. A further reduction in core inflation will open the doors to another rate cut on July 24, particularly given the continued rise in the Canadian unemployment rate. Rising monthly mortgage payments in the wake of record renewals will continue to slow discretionary consumer spending, providing further impetus for Bank of Canada rate cuts.

Please Note: The source of this article is from SherryCooper.com/category/articles/

Average rents across Canada are now up 32% from their pandemic lows.

The average asking rent in May was $2,202, up $200 from the previous month and 9.3% from a year ago, according to the latest monthly report from Rentals.ca.

Rent prices have been climbing steadily in recent years, rising $540 or 32% since hitting their low of $1,662 in April 2021.

“Canada’s rental market is entering the peak summer season with continued strength,” said Shaun Hildebrand, President of Urbanation, which co-released the report.

“Markets such as Vancouver and Toronto that had experienced some softening in rents in previous months are stabilizing near record highs, while many of the country’s mid- and small-sized cities are still posting double-digit rent increases,” he added.

The Rentals.ca report noted that rents have averaged an annual growth rate of 9.1% over the past three years. However, when incorporating the declines experienced in 2020 and 2021, the five-year average growth rate is more moderate at 4.7%.

Saskatchewan led the provinces in rent price growth

Provincially, rents increased the most in Saskatchewan, up 21.4% to $1,334. Alberta and Nova Scotia weren’t far behind with average year-over-year increases of 17.5% and 17.1%, respectively.

Quebec was the only province to record a month-over-month decline in apartment rents during May, dipping 0.6% from April to an average of $1,999.

At the municipal level, Regina led rent price growth, with an annual rise of 22% to $1,381.

Among mid-sized markets, Quebec City and Waterloo topped the list, with average annual rent increases of 20% and 19%, respectively.

This article was written for Canadian Mortgage Trends by:

A collective sigh of relief as the BoC cut rates for the first time in 27 month

Today, the Bank of Canada boosted consumer and business confidence by cutting the overnight rate by 25 bps to 4.75% and pledged to continue reducing the size of its balance sheet. The news came on the heels of weaker-than-expected GDP growth in the final quarter of last year and Q1 of this year, accompanied by CPI inflation easing further in April to 2.7%. “The Bank’s preferred measures of core inflation also slowed, and three-month measures suggest continued downward momentum. Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average.”

With continued evidence that underlying inflation is easing, the Governing Council agreed that monetary policy no longer needs to be as restrictive. Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. “Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”

As shown in the second chart below, the nominal overnight rate remains 215 basis points above the current median CPI inflation rate, which shows how restrictive monetary policy remains. The average of this measure of real (inflation-adjusted) interest rates in the past 30 years is just 60 bps. The overnight rate is headed for 3.0% by the end of next year.

Bottom Line

There are four more policy decision meetings before the end of this year. It wouldn’t surprise me to see at least three more quarter-point rate cuts this year. While the overnight rate is likely headed for 3.0%, it will remain well above the pre-COVID overnight rate of 1.75% as inflation trends towards 2%+ rather than the sub-2% average in the decade before COVID-19.