Tomorrow, Bank of Canada chief Tiff Macklem will announce whether he will cut the federal funds rate, a rate that influences most loans such as mortgages and lines of credit. Many people are on alert because this meeting will determine what will happen in the coming months. Many experts expected the Bank of Canada to soon announce a rate cut, but with recent inflation figures still above 3%, there is a risk of accusations of the status quo. Wednesday.
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Why should the key interest rate be lowered and what do experts expect?
According to various surveys and polls, high borrowing costs have slowed economic growth in Canada, unemployment is rising, and businesses and consumers are feeling sluggish. These facts argue for a reduction in the key interest rate. However, financial markets and economists expect the central bank to keep its key interest rate at 5 percent on Wednesday, which would be its fourth holding decision since July. However, maintaining the key interest rate does not mean that there will not be a possible cut later in the year. Analysts will continue to look for clues about the timing of future rate cuts during tomorrow's speech.
Have mortgage rates fallen yet and by how much?
At the moment it is fixed-rate mortgages, for example five years, which have fallen from around 0.75 to 1% in the last three to four weeks. For example, the five-year fixed interest rate at certain banks increased from 6.15% to 5.35%. “But it has nothing or very little to do with the Bank of Canada’s decisions. These interest rates are based on bond interest rates in the markets and therefore on international and macroeconomic factors. The banks’ variable interest rates have not changed,” explains Stéphane Bruyère, mortgage broker at Mortgage Architects.
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Will companies invest again if interest rates fall?
Businesses are also affected by the Bank of Canada's key interest rate. Most SMEs have credit lines and are in debt. Private investment projects are the lowest ever observed, down 12% compared to last quarter, notes the Canadian Federation of Independent Business. Due to the very low long-term trust of SME owners. Certainly a reduction in interest rates in 2024 would remove a thorn in their side. “SME owners who are pessimistic about the future of their business due to rising costs and taxes are much less likely to invest in their business,” explains Simon Gaudreault, chief economist and vice president of CFIB Research.
Does the Bank of Canada necessarily have to follow what the US central bank is doing?
The United States is preparing to cut interest rates in March. ING Economics even predicts that the Federal Reserve (Fed) will cut interest rates six times in 2024. Could such a scenario push or even force the Bank of Canada to do the same? “Historically, the Bank of Canada has not always followed the Fed. It remains autonomous in its decisions based on the economic situation and inflation in Canada,” explains Hendrix Vachon, senior economist at Desjardins. “Obviously our two economies are quite integrated and will tend to develop in similar ways, which may result in several policy decisions moving in the same direction. There is also the problem of currency. If the interest rate differential with the US becomes too large, the Canadian dollar could depreciate too much,” he adds.
Should property prices fall if interest rates fall?
“In 2023, we did not see the turnaround in the situation and the associated drop in prices that many expected. The seller still comes out unscathed, even if they have to negotiate a little more,” Mélanie Bergeron, a real estate agent, recently told the Journal. Strong demand coupled with limited supply helps keep prices high. In Quebec, the average price of a single-family home is now $413,200, up 40% since 2020. A cut in the bank's key interest rate in 2024 could have a mixed impact on house prices, experts say, as it would increase the purchasing power of buyers, which would slow a fall in prices.
MEMORY
The bank raised the key interest rate seven times from 0.25% to 4.25% in 2022 and three times to 5% in 2023. What impact did these ten tariff increases have in less than two years:
– Significant increase in mortgage payments: Some variable loan holders recently extended their mortgage payments and saw their monthly payments nearly double.
– Decline in housing starts: In the first six months of 2023, housing starts in the region fell by 58%. Rising interest rates and inflation affect construction costs and slow construction activity.
– Citizen debt is at record levels: Total consumer debt in Canada reached $2.4 trillion in Q3 2023, an increase of $80.9 billion compared to the same period last year.
– “Car” debt is exploding: more and more car owners and lessees are no longer able to make their monthly payments. The delinquency rate on auto loans 90 days or longer is up 29% compared to last year, and many are handing the keys over to their lenders.
– The government's borrowing costs are rising: The increase in interest rates would lead to a rapid increase in payments on Quebec's debt. The MEI The Institute calculates that a 0.76 percentage point increase in the effective interest rate on new loans from the Quebec government would result in an increase in interest costs on the debt by $1.56 billion in 2027.
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