21 Sep

Inflation Cooled Again in August, But Higher Rates Still Coming

Latest News

Posted by: Gabriel Da Silva

 

Canada’s headline inflation rate cooled again in August, even a bit more than expected. The consumer price index rose 7.0% from a year ago, down from 7.6% in July and a forty-year high of 8.1% in June, mainly on the back of lower gasoline prices.

The CPI fell 0.3% in August, the most significant monthly decline since the early months of the COVID-19 pandemic. On a seasonally adjusted monthly basis, the CPI was up 0.1%, the smallest gain since December 2020. The monthly gas price decline in August compared with July mainly stemmed from higher global production by oil-producing countries. According to data from Natural Resources Canada, refining margins also fell from higher levels in July.
Transportation (+10.3%) and shelter (+6.6%) prices drove the deceleration in consumer prices in August. Moderating the slowing in prices were sustained higher prices for groceries, as prices for food purchased from stores (+10.8%) rose at the fastest pace since August 1981 (+11.9%).

Price growth for goods and services both slowed on a year-over-year basis in August. As non-durable goods (+10.8%) decelerated due to lower prices at the pump, services associated with travel and shelter services contributed the most to the slowdown in service prices (+5.5%). Prices for durable goods (+6.0%), such as passenger vehicles and appliances, also cooled in August.

In August, the average hourly wages rose 5.4% on a year-over-year basis, meaning that, on average, prices rose faster than wages. Although Canadians experienced a decline in purchasing power, the gap was smaller than in July.

Core inflation–which excludes food and energy prices–also decelerated but remains far too high for the Bank of Canada’s comfort. The central bank analyzes three measures of core inflation (see the chart below). The average of the central bank’s three key measures dropped to 5.23% from a revised 5.43% in July, a record high. The Bank aims to return these measures to their 2% target…

 

Bottom Line

Price pressures might have peaked, but today’s data release will not derail the central bank’s intention to raise rates further. Markets expect another rate hike in late October when the Governing Council of the Bank of Canada meets again. But further moves are likely to be smaller than the 75 bps-hikes of the past summer.

There is still more than a month of data before the October 25th decision date. The September employment report (released on October 7) and the September CPI (October 19) will be critical to the Bank’s decision. Right now, we expect a 50-bps hike next month.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

 

 

20 Sep

First Time Home Buyers Guide

Mortgage Tips

Posted by: Gabriel Da Silva

 

Let Us Be Your Guide Through The Mortgage Process.
When you work with us, we’ll pair you with an experienced agent to take you step-by-step through the mortgage process. You’ll receive personalized, one-on-one service designed to get you across the finish line.

 

Notable Terms.
Mortgage Term: The length of time that you’re locked into your rate and conditions.

Down Payment: Any down payment less than 20% requires mortgage default insurance. Over 20% is considered a conventional mortgage, which doesn’t require insurance.

Mortgage Type: An open mortgage allows the borrower the option to pay off all or any of the balance owing on the mortgage at any time, without a penalty but tends to come with a higher interest rate.

Mortgage Rate: You’ll choose either a fixed or variable rate mortgage. Variable rates are often lower but involve more risk, as your payments may fluctuate with the rate set by the Bank of Canada. Fixed rates mean you are locked in for a term and your monthly mortgage payment is set in advance.

Amortization: The number of years it takes to repay your entire mortgage loan amount, based on a fixed payment schedule. Most lenders offer 25-year amortizations.

Closing Costs: Don’t forget about closing costs. Lenders typically like to see that you have at least 1.5% of the purchase price to cover these costs.

Mortgage Stress-Test: Federal regulations have made qualifying for a mortgage a little tougher. Regardless of the low rates offered, you’ll need to qualify to ensure that if mortgage interest rates go up, you’ll still be able to afford your payments.

 

Looking for your First Mortgage? There are Programs and Rebates to Help.

THE HOME BUYERS’ PLAN (HBP)
If you’re a first-time homebuyer, the HBP allows you to withdraw up to $35,000 from your RRSPs tax-free to put toward buying your first home. The HBP allows you to pay back the withdrawn funds within a 15-year period.

THE FIRST-TIME HOME BUYER INCENTIVE
The First-Time Home Buyer Incentive helps people across Canada purchase their first home. The program offers 5% or 10% of the home’s purchase price to put toward a down payment. You pay back the same percentage of the value of your home when you sell it or within a 25-year window.

 

The Mortgage Financing Process.
The number one question for someone new to the mortgage process is “what does this process entail?”. The following is a simple outline to give you an idea of the process and help you understand what to expect as you embark on your home buying journey!

STEP 1 – BE PREPARED
Having the following information on hand before meeting with your mortgage professional will help them determine what you qualify for and help them determine the best mortgage product for you:

Contact information for your employer and your employment history
Proof of address and your address history
Government-issued photo ID with your current address
Proof of income for your mortgage application
Down payment proof (amount and source)
Savings and investments proof
Details of current debts and other financial obligations

STEP 2 – GET PRE-APPROVED
One of the best things any potential homeowner can do when starting the home buying process is to get pre-approved. Mortgage pre-approval requires submission and verification of your financial history and can help you determine your price range, understand the monthly mortgage payment associated with that price range and provide the mortgage rate for your first term.

It is important to note that pre-approval does not mean that a lender has fully reviewed your documentation and you may still need the approval of a mortgage insurer. However, it does have a lot of benefits that can give you a “leg-up” in your search!

BENEFITS OF PRE-APPROVAL
Getting pre-approved not only makes the search easier by helping to determine your price range and budget, but pre-approval also guarantees the interest rate for 90-120 days while you search for that perfect home. Plus, the rate will automatically be adjusted down with any market reductions. Another benefit to pre-approval is that, when it comes time to purchase, pre-approval lets the seller know that securing financing should not be an issue. This is extremely beneficial in competitive markets where lots of offers may be coming in.

Quick Tip: Being entirely candid with your home-buying team throughout the process will be vital! Hidden debt or buying a big-ticket item during your 90-120 day pre-approval can change the amount you are able to borrow. It is best to refrain from any major purchases (such as a new car) or life changes (such as changing jobs) until after closing and you have the keys to your new home!

STEP 3 – HIRE A REALTOR
In today’s competitive real estate market, it can be very difficult to acquire property WITHOUT the help of a realtor. One of the reasons realtors are integral to the home buying process is that they can provide access to properties that never even make it to the MLS website. Realtors also gain access to information about homes that may come onto the market before a listing is even signed.

Most importantly though, a realtor understands the ins-and-outs of the home buying process and can tell you how to be successful in your endeavors to purchase a home by guiding you through the process from the first viewing to having your bid accepted.

STEP 4 – SHOP THE MARKET & MAKE AN OFFER
Once you have found the property that meets your needs, you’ll put in an offer that’ll be accepted or countered. This may go back and forth until you reach an acceptable price with the vendor.

STEP 5 – OFFER IS ACCEPTED
Once your offer is accepted with the condition of financing, you will need to do a few things to finalize the sale:

Ask for a realtor intro between your mortgage professional and realtor.
An appraisal may be required, which will be determined and arranged by your mortgage professional.
Send in any remaining documents required for financing (income confirmation, down payment confirmation, etc).
Arrange a home inspection.
Receive the lender’s approval on property and final approval letter.
STEP 6 – REMOVE CONDITIONS
At this point, your financing is in place and you’re ready to proceed with the purchase of the property.

STEP 7 – LAWYER’S OFFICE
You’ll be asked to provide any money that’s to be used as your down payment, which is not already on deposit with your realtor. Typically, you’ll go in 1-2 days prior to the completion date.

 

DLC-FCF

 

6 Sep

Understanding Mortgage Trigger Points

Mortgage Tips

Posted by: Gabriel Da Silva

 

As we move into the Fall market, there are some important things you should be aware of.

While inflation has now likely peaked, we will still be dealing with the repercussions from these heightened levels for a while before things balance out. As inflation is corrected, we are also seeing home prices moving back to normal post-pandemic era.

However, we are still anticipating some final rate hikes from the Bank of Canada coming into the fall.

With that in mind, now is an important time to discuss what this means for your mortgage – specifically in regards to trigger points. Another increase in rates on the horizon will put many variable-rate borrowers near their mortgage trigger points – even for fixed payments.

While static payment variable-rate mortgages are not designed to fluctuate with prime, the reality is that a mortgage payment consistent of two components: your principle and your interest. With the existing rates and subsequent increases expected in the fall, the amount paid towards principle has decreased with an increase in the amount of interest on a static mortgage. For instance, if you are paying $2000 a month on your mortgage, only $200 might be going towards the principle with the rest covering interest. An additional increase to the interest rate, means that your interest portion will spike again and may actually exceed your total payment. When this occurs, it is called hitting your trigger rate.

You can calculate your own trigger rate with the following formula: (Payment amount X number of payments per year / balance owing) X 100) to get your trigger rate in percentage.

If you have reached your trigger rate, don’t panic. You are certainly not alone and there are options:

  1. Adjust Your Payment: Firstly, you may choose to adjust your payment amount to ensure that you still have some going towards your principal balance.
  2. Review Your Amortization Schedule: Consider switching your amortization schedule from 20-year to 25-year which would be ideal if you already have equity in your home. However, if you’re already at your maximum amortization for your lender (i.e. 30-year mortgage), you would need to increase your payment.
  3. Switch to a Fixed-Rate Mortgage: Many borrowers are now choosing to opt for a fixed-rate mortgage to avoid the issue of increased interest and trigger rates. Keep in mind, depending on your mortgage product, you may face penalties if you switch your mortgage mid-term. Be sure to discuss any mortgage changes with me before going ahead.
  4. Pay Off Your Mortgage: The final option that is always there is for you to pay off your mortgage entirely. Though don’t fret if this is not possible!

While I understand words like “inflation” and “trigger rates” can be scary, as a dedicated mortgage professional I am here for you. I would be happy to discuss any concerns you have or help explain in more detail how these changes may impact your mortgage and what your options are.

 

Gabriel Da Silva
Dominion Lending Centres – FC Funding
Commercial & Residential Mortgage Agent
Lic.# 10671
Independently owned and operated
www.DLC.mortgage
416.587.3787

 

10 Aug

Finally, Some Good News on the Inflation Front

Latest News

Posted by: Gabriel Da Silva

It was widely expected that US consumer price inflation would decelerate in July, reflecting the decline in energy prices that peaked in early June. The US CPI was unchanged last month following its 1.3% spike in June. This reduced the year-over-year inflation rate to 8.5% from a four-decade high of 9.1%. Oil prices have fallen to roughly US$90.00 a barrel, returning it to the level posted before the Russian invasion of Ukraine. This has taken gasoline prices down sharply, a decline that continued thus far in August. Key commodity prices have fallen sharply, shown in the chart below, although the recent decline in the agriculture spot index has not shown up yet on grocery store shelves. US food costs jumped 1.1% in July, taking the yearly rate to 10.9%, its highest level since 1979.

The biggest surprise was the decline in core inflation, which excludes food and energy prices. The shelter index continued to rise but did post a smaller increase than the prior month, increasing 0.5 percent in July compared to 0.6 percent in June. The rent index rose 0.7 percent in July, and the owners’ equivalent rent index rose 0.6 percent.

Travel-related prices declined last month. The index for airline fares fell sharply in July, decreasing 7.8%. Hotel prices continued to drop, falling 2.7% on the heels of a similar decrease in June. Rental car prices fell as well from historical highs earlier this cycle.

Bottom Line

The expectation is that the softening in inflation will give the Fed some breathing room. Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.

Treasury yields slid across the curve on the news this morning while the S&P 500 was higher and the US dollar plunged. Traders now see a 50-basis-point increase next month as more likely than 75. Next Tuesday, August 16, the July CPI will be released in Canada. If the data show a dip in Canadian inflation, as I expect, that could open the door for a 50 bps rise (rather than 75 bps) in the Bank of Canada rate when they meet again on September 7. That is particularly important because, with one more policy rate hike, we are on the precipice of hitting trigger points for fixed payment variable rate mortgages booked since March 2020, when the prime rate was only 2.45%. The lower the rate hike, the fewer the number of mortgages falling into that category.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

4 Jun

Another Jumbo Rate Hike, Signalling More To Come

Latest News

Posted by: Gabriel Da Silva

Bank of Canada Leaves Expectations For 2022 Rate Hikes Intact

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points once again today, marking the third rate hike this year. The two back-to-back half-point increases are without precedent, but so were the dramatic pandemic rate cuts in the spring of 2020. Indeed, with the surge in Canadian inflation to 6.8% in April, the Bank of Canada is still behind the curve. The chart below shows that inflation remains well above the Bank’s forecasts. Today’s press release suggests they now estimate that inflation rose again in May and could well accelerate further.

Today’s policy statement emphasized that “As pervasive input price pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%. Almost 70% of CPI categories now show inflation above 3%. The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.”

“The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022.”

The Bank said that “Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid.”

Bottom Line

The Bank of Canada couldn’t be more forthright. The concluding paragraph of the policy statement is as follows: “With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool. The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”

The Bank of Canada has told us we should expect at least another 50 bps rate hike when they meet again on July 13. It could even be 75 bps if inflation shows no sign of decelerating. The Bank estimates that the overnight rate’s neutral (noninflationary) level is 2%-to-3%. Traders currently expect the policy rate to end the year at roughly 3%.

This was a very hawkish policy statement. The central bank is defending its credibility and will undoubtedly continue to tighten monetary policy aggressively.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

8 Apr

Labour Market Tightens Further

Latest News

Posted by: Gabriel Da Silva

Statistics Canada released the March Labour Force Survey this morning, reporting a 72,500 jobs gain from the whopping 337,000 surge in February. Employment increased in both the goods- and services-producing sectors. Gains were concentrated in Ontario and Quebec. The unemployment rate fell to 5.3%, its lowest monthly rate since the data series was released in 1976, compared to 5.5% in February.

This adds more fuel to the notion that the Bank of Canada is behind the curve and will likely raise the overnight policy rate by 50 basis points next week. Indeed, Canada’s 2-year government note yield spiked on the news to 2.46%, up 2.38% at yesterday’s close.

Swap markets are now predicting a 75% probability of a half-point hike next week and an overnight rate of 3% a year from now. The overnight rate was 1.75% in February 2020, just before the pandemic began. Since then, inflation has surged from just over 2% to 5.7% in February. The March inflation data will be released on April 20, and it is widely expected to rise further. Indeed, the gauge of global food prices inflation is currently at a record high, exacerbated by the disruptions associated with the Ukraine war.

Adding to inflationary pressure is the rise in Canadian wage rates coming from the excess demand for labour. Total hours worked rose 1.3% in March. Average hourly wages increased 3.4% on a year-over-year basis, up from 3.1% in February. Illustrating the imbalances between labour supply and demand, employment gains since September (+463,000; +2.4%) have outpaced growth in the size of the population aged 15 and older (+236,000; +0.8%) during the same period.

Bottom Line

This Labour Force Survey was conducted in mid-March, after the February 24th start of the Ukrainian War. Since then, many commodity prices have surged, especially oil, gasoline, aluminum, wheat and fertilizer. This has boosted inflation worldwide, dampening consumer and business confidence and reducing family purchasing power. The Bank of Canada’s recent Business Outlook Survey shows that businesses expect inflation to continue for two years.

The newly released Bank of Canada Survey of Consumer Expectations shows record-high short-term inflation expectations. Despite more significant concerns about inflation today, longer-term expectations have remained stable and are below pre-pandemic levels. This suggests that long-term inflation expectations remain well-anchored, and those survey respondents believe the current rise in inflation will not last.

This view is predicated on the Bank of Canada tightening monetary policy significantly. All messaging from the Bank confirms that it will provide this by raising the overnight rate to around 3% over the next year and by quantitative tightening, reducing its holdings of Government of Canada bonds.

Anecdotal evidence suggests that housing markets have already responded to rising mortgage rates. Supply has increased, and multiple-bidding activity has weakened.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

21 Mar

Inflation Pressures Accelerating

Latest News

Posted by: Gabriel Da Silva

StatsCanada today reported that consumer prices rose 5.7% year-over-year in February, up again from the prior month’s 5.1% rise. This was the largest gain since August 1991 (+6.0%).

This was no surprise, as the Ukraine War has stepped up inflation pressure worldwide. The US CPI rose a whopping 7.9% last month (see chart below).
Price increases were broad-based in February, pinching the pocketbooks of Canadians. Consumers paid higher prices for gasoline and groceries in February 2022 compared with the same month a year earlier. Shelter costs continued to trend higher, rising at the fastest year-over-year pace since August 1983.

Excluding gasoline, the Consumer Price Index (CPI) rose 4.7% year over year in February, surpassing the gain in January (+4.3%) when the index increased at the fastest pace since its introduction in 1999.

On a monthly basis, the CPI rose 1.0% in February, the most significant increase since February 2013, following a 0.9% increase in January. On a seasonally adjusted monthly basis, the CPI rose 0.6%.

Gasoline Prices Surge Amid Geopolitical Conflict
Canadian motorists paid 32.3% more at the pump compared with February 2021.

Monthly gasoline prices increased 6.9% amid geopolitical conflict in Eastern Europe and the Middle East, as uncertainty surrounding the global oil supply put upward pressure on prices.

Similarly, prices for fuel oil and other fuels increased 8.5% month-over-month following higher international energy prices.

Grocery Prices Shot Up Again
Prices for food purchased from stores (+7.4%) rose faster in February than in January (+6.5%). This is the most significant yearly increase since May 2009. Higher input prices and heightened transportation costs continued to contribute to inflationary pressure in February.

Price growth for meat (+11.7%), including fresh or frozen beef (+16.8%) and chicken (+10.4%), was higher year over year in February than in January (+10.1%).

Shelter Costs Rise At Fastest Pace Since 1983
In February, shelter costs rose 6.6% year over year, the fastest pace since August 1983. Higher costs for both owned accommodation (+6.2%) and rented accommodation (+4.2%) increased.

Homeowners’ replacement cost (+13.2%), which is related to the price of new homes, and other owned accommodation expenses (+14.3%), which includes commissions on the sale of real estate, remained elevated year over year. In contrast, mortgage interest cost (-6.0%) moderated the shelter index on a year-over-year basis.

According to the Canadian Mortgage and Housing Corporation, improved economic and demographic conditions over the past year, including youth employment recovery and resumption of international migration to Canada, supported rental demand. This, in part, contributed to higher rent (+4.2%) prices year over year in February.

Bottom Line

Inflation has exceeded the Bank of Canada’s 1%-to-3% target band for 11 consecutive months. Other central banks have already begun to hike overnight rates from their effective lower bound introduced in March 2020.

Today, the U.S. Federal Reserve hiked the overnight policy target for the first time since 2018 by 25 basis points and signalled that it expects to hike rates six times more this year.

The global geopolitical tensions and rising risk of a drawn-out conflict exacerbate inflation and supply bottlenecks, delaying a return to sub-3% inflation.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

2 Mar

Bank of Canada Starts Hiking Rates

Latest News

Posted by: Gabriel Da Silva

 

 

Bank of Canada Starts Hiking Rates, Signalling More To Come

The Governing Council of the Bank of Canada raised the overnight policy rate target by a quarter percentage point in a widely expected move and signalled that more hikes would be coming. This is the first rate hike since 2018. In a cautious stance, the Bank announced it was continuing the reinvestment phase, keeping its overall Government of Canada bonds holdings on its balance sheet roughly stable.

The Bank’s press release highlighted the major new source of uncertainty provided by the unprovoked invasion of Ukraine by Russia and suggested that it is a new source of substantial inflation pressure. Prices for oil, metals, wheat and other grains have skyrocketed recently. Moreover, this geopolitical distention negatively impacts confidence worldwide and adds new supply disruptions that dampen growth. “Financial market volatility has increased. The situation remains fluid, and we are following events closely.”

The Bank commented that economies have emerged from the impact of the Omicron variant more quickly than expected. Demand is robust, particularly in the US.

“Economic growth in Canada was very strong in the fourth quarter of last year at 6.7%. This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed. Both exports and imports have picked up, consistent with solid global demand. In January, Canada’s labour market recovery suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism. However, the rebound from Omicron now appears to be well in train: household spending is proving resilient and should strengthen further with the lifting of public health restrictions. Housing market activity is more elevated, adding further pressure to house prices. Overall, first-quarter growth is now looking more solid than previously projected.”

Canadian CPI inflation has risen to 5.1%, as expected in January, well below the 7.5% level posted in the US.” Price increases have become more pervasive, and measures of core inflation have all risen. Poor harvests and higher transportation costs have pushed up food prices. The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities. All told, inflation is now expected to be higher in the near term than projected in January. Persistently elevated inflation increases the risk that longer-run inflation expectations could drift upwards. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.”

The final paragraph of the Bank’s press release speaks with great clarity: “The policy rate is the Bank’s primary monetary policy instrument. As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further. The Governing Council will also be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink. The resulting quantitative tightening (QT) would complement the policy interest rate increases. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.”

 

 

Bottom Line

The Bank of Canada has made a clear statement regarding the outlook for a normalization of interest rates. We expect a series of rate hikes over the next year. Expect another 25 basis point increase following the next meeting on April 13. The increased uncertainty and volatility arising from the war in Ukraine is front of mind worldwide. Still, it will not deter central banks from tightening monetary policy to forestall an embedded rise in inflation expectations.

The Bank of Canada has postponed Quantitative Tightening, for now, a prudent move in the face of geopolitical uncertainty.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

5 Feb

No Wonder The Bank of Canada Didn’t Hike Interest Rates Last Month

Latest News

Posted by: Gabriel Da Silva

 

Statistics Canada released the January Labour Force Survey this morning, reporting a much more extensive than expected decline in jobs last month. The Omicron shutdowns and restrictions took a much larger toll in Canada than expected, as employment fell 200,100 in January and the unemployment rate rose 0.5 percentage points to 6.5%.

Ontario and Quebec drove January employment declines, and accommodation and food services was the hardest-hit industry. In January, youth and core-aged women, who are more likely than other demographic groups to work in industries affected by the public health measures, saw the most significant impacts. Goods-producing sectors recorded a gain, led by construction.

We did not expect the Bank of Canada to hike rates in January because of the risk that Omicron restrictions would batter the economy at least temporarily. If we see a reversal in these declines in February, rate hikes could well commence. The Bank of Canada’s next policy-decision date is March 2. But we won’t see the Labour Force Survey for February until March 11. This could postpone lift-off by the BoC until the next meeting on April 13, when we will have both the February and March employment reports. This would put the first rate hike in April, exactly when the Bank’s forward guidance initially told us the hikes would begin.

The timing of lift-off is subject to the incoming data. It is troubling that the US employment report, also released today for January, was surprisingly strong, in contrast. To be sure, the US did not impose Canadian-style Omicron restrictions last month, but the Omicron wave did depress US economic activity. It was expected to translate into weak hiring. It didn’t. 467,000 jobs were created in the US, and massive upward revisions suggest a fundamentally very strong US economy. With US companies desperate to hire and the most significant issue being the lack of qualified staff, wages are rising more sharply south of the border.

Canadian employment remains just over 30,000 above pre-pandemic levels, and the country has a strong track record of bouncing back after prior waves of the virus. Yet, today’s jobs numbers suggest a tough start for the Canadian economy in the first quarter. Hours worked — which is closely correlated to output — fell 2.2% in January, and the number of employees who worked less than half their usual hours jumped by 620,000. January also saw the first drop in full-time employment — down 82,700 — since June.

Average hourly wages grew 2.4% (+$0.72) on a year-over-year basis in January, down from 2.7% in November and December 2021 (not seasonally adjusted). The January 2022 year-over-year change was similar to the average annual wage growth of 2.5% observed in the five years from 2015 to 2019.

The concentration of January 2022 employment losses in lower-wage industries did not significantly impact year-over-year wage change, partly because employment in these industries experienced similar losses in January 2021 as a result of the third wave of COVID-19.

 

 

 

Bottom Line

There remains uncertainty regarding when (not if) the Bank of Canada will begin to renormalize interest rates. Canadian swaps trading suggests markets are still expecting a hike on March 2, with five more hikes over the next year. Potential homebuyers are certainly anxious to get in under the wire.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

8 Dec

Bank of Canada Leaves Expectations For 2022 Rate Hikes Intact

Latest News

Posted by: Gabriel Da Silva

 

The Bank of Canada decided to keep its target for the overnight rate at 0.25%, in line with forecasts and to maintain its forward guidance, which sees a rise in the overnight rate sometime in the middle quarters of 2022. Until then, policymakers vowed to provide an adequate degree of monetary stimulus to support Canada’s economy and achieve the inflation target of 2%. On the price front, the ongoing supply disruptions continue to support high inflation rates, but gasoline prices, which have been a significant upside risk factor, have recently declined. Still, the BoC expects inflation to remain elevated in the first half of 2022 and ease towards 2% in the second half of the year. Finally, recent economic indicators suggested the economy had considerable momentum in Q4, namely in the labour and housing markets. Still, the omicron variant of the coronavirus and the devastation left by the floods in British Columbia has added to downside risks.The Bank’s press release went on to say, “The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022. We will provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.”

In October, the Bank ended its bond-buying program and is now in its reinvestment stage. It maintains its Government of Canada bonds holdings by replacing securities as they mature.

Bottom Line

Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five times next year. This would take the overnight rate from 0.25% to 1.5%. I think this might be overly hawkish, expecting a more cautious stance of three rate hikes next year to a year-end level of 1.0%. This expectation has already had an impact on economic activity. According to local real estate boards reporting in the past week, November home sales were boosted by buyers hoping to lock in mortgage rates before they rise further next year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres