Santa Tiff is Coming To Town…
December 11, 2024
January 29th, 2025
Gung Hay Fat Choy!
To start the new year off on the right foot, the Bank of Canada (BOC) dropped the prime rate today by 0.25%. With a cautious eye on potential tariffs and signs that inflation may be back to normal, the Governor felt it prudent to continue his march to “normalizing” rates.
The buried lead in today’s press release is the BOC is ending its quantitative tightening measures. Which, translated into English, means they feel they have finally tamed inflation.
So was that last cut in the prime rate? Are we done now?
Maybe not. Economists feel there are two more 0.25% rate cuts to go.
Why would it be needed? To support Canadian businesses.
Tiff and company are not only worried about the impact of US tariffs; they are also seeing a slowing of businesses investing in themselves. Why that bothers Tiff is because, if left unchecked, it can create systemic problems for the economy, such as slowing productivity, job loss which could potentially lead to lower GDP and a weaker stock market.
With all this uncertainty in the air, you can rest assured that Tiff has not taken his finger off the “rate drop” button.
Let’s dive into today’s press release.
Key points from the press release (TLDR)
- BOC expects we’ll stay in the 2% inflation zone for the next 2 years.
- Ending of Quantitive Tightening – Goodbye interest rate headwinds?
- US Tariffs were not factored into today’s rate cut.
- Reduced Immigration targets is taking the pressure off inflation.
Things that could impact your mortgage:
- US bond yields are still drifting higher
- US Inflation is sticky
- Growth in consumer spending is being offset by a lack of business investment
- The Donald
The Donald And Your Mortgage:
Love him or hate him, the most polarizing person on the planet is back and once again messing with your mortgage.
What was supposed to be a beautiful spring for mortgages, filled with blossoming lender rate specials, and the smell of fresh real estate activity in the air; now feels as if winter got a 3 month extension. It’s like Punxsutawney Phil not only saw his shadow but got startled by it!
Am I worried? No. More like slightly annoyed.
Let’s unpack the economic headwinds your mortgage will face in the next quarter:
Tariffs: The economists are mixed on this one. Yes, it could be inflationary, but it could also significantly impact GDP. Slowing GDP means less stuff being made/sold, which could ultimately lead to layoffs and higher unemployment. The net result is they could cancel each other out.
Wage Growth: In my opinion, this is the gum on the bottom of Tiff Macklem’s shoe. Because once you give someone a raise, you can’t take it away. And chances are if you give someone a raise, they go and spend it. Cue the supply and demand discussion and the impact on inflation. Wage growth seems to have cooled, so I will count this point as a positive for lower mortgage rates.
US Inflation: Why is US inflation still an issue? The US consumer who is still enjoying super low interest rates from 4-5 years ago. Given how US mortgages work this will be an issue for some years. Why are we being impacted by US inflation? In short, the Canadian bond market is essentially a boat in the river of what is the US Bond market. We may be able to row the boat and stay in one spot for a while, but eventually, you can’t fight the current. This one counts for a slight negative point for interest rates going down.
The Renewal Cliff: The number of mortgages coming up for renewal in the next 18 months is staggering. What isn’t being discussed is the impact of everyone having $200 – $600/mth sucked out of their family budget. Though I’m confident this won’t lead to a mass sell-off in the real estate market ( the Stress Test has saved us from that ), it does mean that discretionary spending will take a nosedive. That new car, kitchen upgrade, and family European vacation will get shelved. And that will impact inflation in a very positive way. So I’ll count this one as another point for lower mortgage rates.
And with the 2 to 1 win mentioned above, we could still have a chance of lower rates coming in the spring. Hopefully, the bond market will have gotten used to Trump’s whimsical approach to governing and will react with an “I’ll believe it when I see it” level of volatility.
The Bottom Line:
Fixed or Variable?
This is not a question that I thought I would hear so soon! Surprisingly, variable mortgages account for approximately 50% of lenders’ new mortgages these days.
Am I recommending a variable? Not quite yet.
Currently, the 3 year fixed rate is still producing the same results as a variable rate mortgage, but with less risk. Having said that, each borrower’s needs are different, so we highly recommend a discovery call when it comes time for renewal.
Don’t forget that if you are finding your family budget strapped at renewal, we have solutions to ease the pain. Stop stressing and call me. Let’s have that discovery call and start working towards a solution.
That is a wrap for this update. If you find the information helpful, please don’t hesitate to share the link with a friend or co-worker. Or if you prefer, you could keep it all to yourself so you can be the smart one in the office 😉
Enjoy the rest of the month, have a wonderful new year and let’s keep our fingers crossed for that early spring I was alluding to earlier!
The next Bank of Canada meeting is March 12th, 2025
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