Bank of Canada Stands Still
Monday Mar 13th, 2023
Weekly Steve Kornbluth (Agent with TMG Safebridge Mortgage Solutions) touches on "big news" and what it means for the mortgage market moving forward. Have a look at his thoughts for the week of March 13, 2023.
The BoC didn’t increase its policy rate (but did reiterate its hawkish bias).
Canadian variable-rate borrowers rejoiced last Wednesday after the BoC announced that it would hold its policy rate steady (for the first time in nine meetings, going back to March 2022).
In its accompany policy statement, the Bank assessed that economic developments since its last meeting were “in line with the [its] expectation that CPI inflation will come down to around 3% in the middle of this year.” As a reminder, the BoC has repeatedly insisted that inflation must return all the way back to its 2% target before rate cuts will be considered. The closer we get to that level, the harder it will be to achieve incremental price cooling.
The Bank’s carefully worded closing statement reiterated that its pause is conditional on the inflation data evolving as expected. It also reconfirmed the Bank’s hawkish bias when it reminded Canadians that it is “prepared to increase the policy rate further if needed” and “remains resolute in its commitment to restoring price stability for Canadians”.
Then, in a follow-up speech the next day, Senior Deputy Governor Carolyn Rogers noted the Bank’s concern that rising wages haven’t been accompanied by improving labour productivity. She highlighted the Bank’s blunt assessment that “unless a surprisingly strong pickup in productivity growth occurs, sustained 4 per cent to 5 per cent wage growth is not consistent with achieving the 2 per cent inflation target.”
This means if wages are increasing at 4-5% a year, then it's not going to achieve a 2% inflation because people will have the income to continue to spend on consumer products and services, and prices will keep on rising. So this is one of the important indicators to keep an eye on, and if inflation remains elevated then future increases are not out of the question,
We also saw the failure of Silicon Valley Bank in the US and this has cause for concern.
Could this be the canary in the coalmine that central bankers raised rates to high too quickly? This is the largest US bank failure since 2008 and has investors worried about the potential failure of other banks and the overall systemic risk. This concern pushed investors into the safe haven of bonds, driving their yields much lower which will eventually translate into lower fixed mortgages if this is not just a trend.
As of today, the swaps based probabilities of future moves by the Bank of Canada suggests a quarter point cut at its next meeting in April, and an additional 50bps cut by the summer.
Time will tell if this prediction is accurate. The BoC is still concerned about fighting inflation, and is committed until they get it under control. But this news about a US bank failure is certainly a cause for concern this side of the border as well. Even if this doesn't materialize into a rate cut, I think the Bank of Canada will have to take this into consideration before any further rate increases are introduced.
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