Mortgage Interest Rate Cuts In June?

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February's inflation numbers suggest a possible shift in the monetary policy stance of the Bank of Canada, with speculation rising that it may opt for its first mortgage interest rate cut as early as June.
Mortgage Interest Rate Cuts In June?

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February’s inflation numbers suggest a possible shift in the monetary policy stance of the Bank of Canada, with speculation rising that it may opt for its first mortgage interest rate cut as early as June.

According to Statistics Canada’s latest data, headline inflation continued its gradual descent, dropping to 2.8% from January’s 2.9%. This figure mirrors the lowest inflation rate since early 2021 before the surge peaked at 8.1% in the summer of 2022.

The Bank of Canada closely monitors core inflation, which excludes volatile components like food and energy prices. Both CPI-median and CPI-trim came in lower than anticipated, with CPI-median dropping to 3.1% from January’s 3.3%, and CPI-trim falling to 3.2% from 3.4%.

Shelter costs, notably, sustained their upward trajectory, continuing to be the primary driver of inflation. The annualized pace of shelter cost increases surged to +6.5% from +2% in January. Rent inflation saw a slight uptick to 8.2% year-over-year, while mortgage interest costs eased marginally to 26.3% from 27.4%.

The possibility of a rate cut remains uncertain in terms of timing. While many economists predict June for the Bank of Canada’s first rate cut, others caution against unforeseen risks that could alter this timeline.

Bank of Canada Governor Tiff Macklem emphasized the need for a sustained downtrend in inflation before considering interest rate adjustments. “…you don’t want to lower them until you’re convinced…that you’re really on a path to get [to the 2% target], and that’s really where we are right now,” he stated last month.

Ryan Sims, a mortgage broker and former investment banker, echoed this sentiment, emphasizing the importance of sustained trends in inflation. “Two months is not anywhere near a sustained trend, although it is the start of the trend,” he noted.

In their latest forecast, TD Economics expressed caution, suggesting that the battle against inflation has not yet been won. They anticipate the Bank to maintain rates until its July meeting.

However, Douglas Porter of BMO suggested an earlier move by the central bank might not be out of the question. “April still seems too early to be pulling the trigger on rate cuts, though it can’t be entirely ruled out if the Business Outlook Survey shows even more [inflation] progress,” he commented.

There are risks associated with both acting too soon and waiting too long to cut rates. A premature rate cut could boost demand, particularly in real estate, leading to upward pressure on inflation. Conversely, maintaining high interest rates for too long could exacerbate economic downturn risks.

National Bank economists Matthieu Arseneau and Alexandra Ducharme warned about the current restrictive interest rate environment, suggesting it could further dampen inflation. They cautioned that overly restrictive monetary policy might inflict significant damage to the economy.

Oxford Economics reiterated its belief in a mild recession in Canada’s economy. They anticipate slower headline CPI inflation, aligning with a soft landing scenario. Nonetheless, the Bank of Canada projects a longer timeline for inflation to return to its 2% target, anticipating a rebound by 2025 according to its latest Monetary Policy Report from January.

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