5 Questions Following June’s Central Bank Rate Announcements

1. Will the Bank of Canada (BoC) cut rates again in July?

The BoC could have started cutting in April, but it wanted further evidence that inflation is coming down, which it got. This delay was probably not strictly due to a lack of confidence, but also to a desire to take into account how the expectations of market participants, forecasters, businesses and households were likely to shift once the train of rate cuts left the station. Given current conditions, we expect the BoC to lower rates again in July. We’re still calling for a total of four cuts this year.

2. What does the BoC’s rate cut mean for mortgages?

The BoC’s initial rate cut was mostly symbolic. The winners are variable-rate mortgage holders, who were hit hard by rate hikes over the last two years. But renewing at a variable rate isn’t necessarily the best option right now External link.. Compared to a fixed rate locked in for a slightly longer term, the potential savings of a variable rate don’t compensate for the risk. That could change in a couple of years when we think rates will stabilize at lower levels. But for borrowers worried that their payments will go up, a long-term fixed rate will be just as attractive. That’s why we’re calling for External link. incentives to encourage lenders to offer 10‑year fixed-rate mortgages.

3. Will lower interest rates lead the housing market to overheat again?

If that was going to happen, we’d probably be seeing it already. Even though rate cuts were widely anticipated, pricey housing markets like Vancouver and Toronto haven’t been all that hot this year. On the contrary. In Quebec, sales have recovered External link. but remain below pandemic highs. Listings are up in many areas of the country, a sign that homeowners are eager to sell. Given today’s low inventories and pent-up demand, we could see prices rise, but severe affordability challenges External link. will continue to sideline most first-time home buyers and keep a lid on prices.

4. Why did the Federal Reserve (Fed) trim its rate cut projections for this year?

The Fed kept rates unchanged this week despite encouraging new inflation data. Only 8 of 19 FOMC members think two rate cuts will be warranted this year, with the median forecast now seeing just one reduction instead of two. This means that a couple of encouraging inflation reports aren’t enough to satisfy the Fed. Wage growth will have to come down to reassure them that the decline in services inflation we’re starting to see will continue. Although Jerome Powell is downplaying the possibility of additional rate hikes, some Fed officials have recently signalled they’re still open to the idea. US and Canadian interest rates have diverged this month, but the loonie has largely held its ground, falling less than 1% since the start of June. Despite recent divergence concerns, we believe External link. the BoC has ample room to pursue its own monetary policy.

5. The BoC has hinted at its next moves. Why is the European Central Bank (ECB) playing it so close to the vest?

Faced with economic uncertainty and inflationary pressures, the ECB this month revised its inflation projections higher and noted that progress on inflation has been very uneven across the eurozone. Wage growth remains historically strong in Europe, unlike in Canada where it’s showing signs of moderating. It’s hard for central banks to cut rates decisively under such circumstances. So the ECB will likely fall somewhere between the BoC and the Fed when it comes to the number of rate cuts in the second half of the year.