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On Wednesday April 10th at their regular policy meeting, the Bank of Canada (BoC) once more decided to keep their Policy Rate at 5 per cent. This means that lenders will hold their consumer Prime Rate steady at 7.20 per cent and there will be no changes to the payment amounts for variable rate mortgages or Lines of Credit.

This is the sixth time in the row now that the BoC has left the policy rate unchanged.

Currently, we believe there is a good chance the BoC will begin easing with a 0.25% rate cut at either their June 5th or July 24th meeting. However, that is contingent upon several factors.

First, the BoC has to be confident that the trend of inflation is firmly declining and that demand will not immediately come roaring back at the first sign of rates falling. For this, they are looking closely at Consumer Price Index (CPI) inflation, unemployment and economic growth reports. In February CPI inflation dropped to 2.8% (down from 2.9% the month prior), and the unemployment rate jumped to 6.1% (up from 5.8% the month prior). The former indicates people are continuing to spend less, and the latter indicates businesses are not experiencing as much demand and are responding with reduced hiring.

As for economic growth, the data shows that the second half of 2023 was very weak and in most cases supply of goods outstripped demand.

All of these factors contribute to a view that the BoC will need to cut rates soon in order to prevent a full-on recession.

Unfortunately, our neighbour to the south is experiencing much more economic strength than expected, and the Federal Reserve has recently indicated that it may not be in a position to cut rates at all this year. Their infaltion rate ticked up in March, and their unemployment rate dropped to 3.8% (from 3.9% the previous month) and sits much lower than the long-term average of 5.7%. If the US economy isn’t slowing down and the Fed does not cut rates, it’s going to put the BoC in a very tough position.

What happens if the Bank of Canada cuts rates and the Federal Reserve (US) doesn’t?

When the BoC cuts rates, the yields on our government bonds go down (they pay less to investors). For international investors who invest billions of dollars into government bonds all over the world, this makes Canada’s bonds less appealing. If the Fed does not cut rates, US government bonds continue paying higher interest rates and so they become more appealing relative to Canada bonds. When this happens, investors sell their Canadian bonds and exchange their Canadian dollars for US dollar so they can buy US government bonds.

And when a whole bunch of Canadian dollars are being sold and US dollars being purchased, it drives down the value of Canadian dollars relative to US dollars.

This isn’t just bad for every Canadian who wants to go to Disneyland. When the Canadian dollar falls in value relative to the US dollar, it means that all of the stock that Canadian businesses import from the US becomes more expensive, and to compensate they have to increase their prices for all Canadian consumers. And because we import so much from the United States, this factor could substantially contribute to CPI inflation and work against the BoC’s push towards the 2% target.

Have questions?

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Please book an appointment today with one of our broker team to discuss your plans and we’ll make sure you have all the information you need to make the best financial decision and get the best mortgage to reach your goals.

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