On July 12, 2023, the Bank of Canada raised its target for the overnight rate to 5%, with the Bank Rate at 5.25% and the deposit rate at 5%. It was the second increase in a row.
Bank of Canada policy rate, %
What the Bank said
- Consumption grew a surprisingly strong 5.8% in the first quarter.
- The housing market has picked up, and new construction and listings are lagging demand.
- Inflation eased to 3.4% in May, down from a peak of 8.1% last summer.
- The Bank now expects CPI inflation to hover around 3% for the next year and reach 2% only in the middle of 2025.
- It projects real GDP growth of 1.8% in 2023 and 1.2% in 2024.
What it means for Calgary
Borrowing costs are now the highest of this cycle. Calgary’s market has stayed strong thanks to jobs and migration, but buyers should budget for rates staying high for longer. The next decision is on September 6, 2023.
A slower path back to 2%
The July Monetary Policy Report forecasts CPI inflation to hover around 3% for the next year before gradually declining to 2% in the middle of 2025. That is a slower return to target than in the January and April forecasts. Inflation eased to 3.4% in May, a big drop from 8.1% last summer, but the decline came more from lower energy prices than from easing underlying inflation. Three-month rates of core inflation have been around 3.5% to 4% since last September, and the Bank’s business surveys show companies are still raising prices more often than normal.
The economy keeps surprising
Recent retail and other data suggest more persistent excess demand. The labour market shows signs of more available workers, but it remains tight, with wage growth around 4% to 5%. Strong population growth from immigration adds both demand and supply: newcomers ease the shortage of workers, while also boosting consumer spending and demand for housing.
The Bank expects growth to slow, averaging around 1% through the second half of this year and the first half of next. It projects real GDP growth of 1.8% in 2023 and 1.2% in 2024, before 2.4% in 2025.
Housing gets a direct mention
The Bank noted that the housing market has seen some pickup and that new construction and real estate listings are lagging demand, adding pressure to prices. That describes Calgary well: CREB reported a record 3,146 sales in June, inventory at the lowest June level in nearly two decades and a total benchmark of $564,700.
Global conditions
Global inflation is easing with lower energy prices and goods inflation, but services inflation remains persistent. US growth has been stronger than expected, China’s economy is softening, and the euro area has effectively stalled. Bond yields are up in North America and Europe as major central banks signal that more increases may be needed. The global economy is projected to grow around 2.8% this year.
What it means for you
- Variable-rate borrowers: after two increases in a row, check your statements; some fixed-payment variable mortgages may have reached their trigger point.
- Buyers: lenders test your ability to pay at a qualifying rate above your contract rate, so higher rates reduce the amount you can borrow.
- Owners renewing: plan for rates staying higher for longer than many expected earlier this year.
Quantitative tightening continues
Besides raising the rate, the Bank is continuing quantitative tightening, which it says complements the restrictive stance of monetary policy and normalizes its balance sheet. Governing Council said it is concerned that progress towards 2% could stall. It will keep evaluating whether excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with the target. The next decision is on September 6, 2023.
