After 10 Interest Rates Increases, We now are on our 2nd decrease to 4.50%

Monetary Policy Decision

The Bank of Canada today lowered its policy interest rate by 25 basis points. The overnight rate target is now 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank will continue to normalize its balance sheet.

Global Economy

Global economic growth is projected to remain steady at around 3% through 2026. While inflation is still elevated in most advanced economies, it is gradually declining. The US economy is slowing as expected, with consumer spending moderating and inflation easing. The euro area is recovering from a weak 2023. China’s economy is growing modestly,supported by exports despite weak domestic demand. Global financial conditions have improved, with lower bond yields,higher stock prices, and strong corporate borrowing. Oil prices and the Canadian dollar have remained relatively stable compared to the Bank’s April forecast.

Canadian Economy

Canada’s economy likely grew by about 1½% in the first half of 2024. However, with strong population growth, the economy is operating below capacity, leading to excess supply. Household spending, including on housing, has been weak. The labour market is softening, with rising unemployment, slower job growth, and longer job search durations.Wage growth is moderating but remains elevated.

Looking ahead, the Canadian economy is expected to strengthen, supported by rising exports and increased business and household spending as borrowing costs decline. Housing investment will also grow significantly. However, slower population growth in 2025 will temper economic expansion. Overall, GDP is forecast to grow by 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. This gradual strengthening will help reduce excess supply in the economy.

Inflation

Inflation eased to 2.7% in June, reflecting broader price pressures declining. The Bank’s core measures of inflation have been below 3% for several months, and the overall pattern of price increases is returning to normal levels. However,shelter costs, driven by rent and mortgage interest, continue to contribute significantly to overall inflation. Inflation in services related to wages, such as restaurants and personal care, is also elevated.

The Bank expects core inflation to slow to around 2½% in the second half of 2024 and continue to decline in 2025. Total inflation is forecast to fall below core inflation later this year due to temporary factors affecting gasoline prices. As these factors dissipate, inflation may rise slightly before stabilizing around the 2% target next year.

Monetary Policy Outlook

Given the easing of broad price pressures and the expected decline in inflation towards the 2% target, the Bank has reduced the policy interest rate by 25 basis points. While excess supply is helping to reduce inflation, price pressures in some areas, particularly shelter and certain services, are persistent. The Bank will carefully monitor these opposing forces and adjust monetary policy as needed to achieve the 2% inflation target.

Information Note

The next interest rate announcement is scheduled for September 4, 2024. The Bank will release its next full economic and inflation forecast on October 23, 2024.

Impact of the Bank of Canada’s Decision on Mortgage Qualifiers in the GTA

The recent interest rate cut by the Bank of Canada is generally positive news for Canadians looking to qualify for a mortgage. Lower interest rates typically mean lower mortgage payments, making it easier for potential homebuyers to meet the qualifying criteria.

However, the situation is more complex in the GTA, where housing prices remain exceptionally high. While a lower interest rate can improve affordability, it’s essential to consider the following factors:

Positive Impacts:

• Lower Mortgage Payments: With lower interest rates, monthly mortgage payments will decrease, freeing up more disposable income for potential homebuyers.
• Increased Borrowing Power: Lower rates can potentially increase borrowing capacity, allowing buyers to qualify for larger mortgages.

Challenges Persisting in the GTA:

• High Housing Prices: Even with lower interest rates, the overall cost of purchasing a home in the GTA remains a significant barrier for many.
• Stricter Mortgage Qualification Rules: While interest rates have decreased, the stress test for mortgage qualification remains in place, which can limit borrowing capacity.
• Competition: The GTA housing market is highly competitive, and even with improved affordability, securing a home can be challenging.

Overall Outlook:

While the interest rate cut is a step in the right direction, it’s unlikely to dramatically change the housing market in the GTA. Prospective homebuyers will still face significant challenges due to high prices and competition.

To improve your chances of qualifying for a mortgage in the GTA:

• Increase Your Down Payment: A larger down payment can significantly improve your mortgage affordability.
• Improve Your Credit Score: A good credit score can help you secure better interest rates.
• Shop Around for Mortgage Rates: Compare offers from different lenders to find the best deal.
• Consider Alternative Housing Options: Explore options like condos or townhouses, which may be more affordable than detached homes.

It’s crucial to consult with a mortgage broker to assess your specific financial situation and explore your options. They can help you understand the impact of the interest rate change on your ability to qualify for a mortgage in the GTA.