On September 6, 2023, the Bank of Canada held its target for the overnight rate at 5%, with the Bank Rate at 5.25% and the deposit rate at 5%.
Bank of Canada policy rate, %
What the Bank said
- The economy has entered a period of weaker growth. Output contracted 0.2% (annualized) in the second quarter.
- Consumption growth weakened and housing activity declined; wildfires also weighed on output.
- CPI inflation eased to 2.8% in June, then rose to 3.3% in July.
- Governing Council remains concerned about underlying inflation and is prepared to raise the rate further if needed.
What it means for Calgary
Holding is not cutting. Calgary’s market has held up better than the national picture thanks to migration, but mortgage rates are likely to stay high into 2024. The next decision is on October 25, 2023.
Why the Bank paused
The Bank raised its rate in June and again in July. In September, it said there is recent evidence that excess demand in the economy is easing, and that monetary policy works with a lag. It decided to hold at 5% and to continue normalizing its balance sheet, also called quantitative tightening. It added that the Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures.
Housing activity declined in the spring
Output contracted by 0.2% at an annualized rate in the second quarter. The Bank pointed to a marked weakening in consumption growth, a decline in housing activity and the impact of wildfires in many regions. Household credit growth slowed as higher rates restrained spending among a wider range of borrowers. Final domestic demand still grew 1%, supported by government spending and business investment. The labour market continues to ease gradually, but wages are still rising around 4% to 5%.
Inflation is not falling fast enough
CPI inflation eased to 2.8% in June and moved back up to 3.3% in July, averaging close to 3% as the Bank had projected. Higher gasoline prices are expected to push inflation up in the near term before it eases again. More worrying for the Bank, year-over-year and three-month measures of core inflation are both around 3.5%, which shows little recent downward momentum. The longer high inflation lasts, the Bank warned, the greater the risk it becomes entrenched.
Calgary looks different from the national picture
Nationally, housing activity declined in the second quarter. In Calgary, CREB reported record sales for August, with 2,729 sales and only 3,254 homes for sale, a record low for the month. The total benchmark price reached $570,700, the eighth monthly gain in a row. CREB has repeatedly pointed to continued migration and relative affordability as the reasons Calgary’s market has not followed the national slowdown.
Global background
Global growth slowed in the second quarter, largely because of a significant slowdown in China, where weakness in the property sector is hurting confidence. US growth was stronger than expected, and Europe’s service sector offset weakness in manufacturing. Global bond yields have risen, and oil prices are higher than the Bank assumed in July. Higher bond yields matter for Canadian fixed mortgage rates.
What it means for you
- Variable-rate borrowers: a hold gives some breathing room, but the Bank is prepared to raise again if needed.
- Fixed-rate shoppers: fixed rates follow bond yields, which have risen, so a pause at the Bank does not mean lower fixed rates.
- Buyers: keep your pre-approval current and budget at today’s rates.
What the Bank will watch before October
Governing Council said it will keep assessing core inflation and the outlook for CPI inflation. In particular, it will evaluate whether excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with reaching the 2% target. The next decision is on October 25, 2023, with a new Monetary Policy Report.
