Province Caps Annual Rent Increase

General Angela Calla 11 Sep

Province caps annual rent increase well below inflation

For the second consecutive year, B.C.’s maximum allowable rent increase is being set below the inflation rate. The maximum increase for 2024 will be 3.5%.

“Across the country, costs have been increasing — especially for housing — at a rate that’s unsustainable for many people,” said Ravi Kahlon, Minister of Housing. “We know that’s the case for both landlords and renters, and that’s why we’ve found a balance to protect renters while helping to keep rental units on the market.”

The rent cap of 3.5% is well below the 12-month average inflation rate of 5.6% and applies to rent increases with an effective date on or after Jan. 1, 2024. If landlords choose to increase rent, they must provide a full three months’ notice to tenants using the correct Notice of Rent Increase form. B.C. landlords can increase rent only once every 12 months.

The Province has been taking steps to support renters throughout British Columbia. Before 2018, the annual allowable rent increase was based on the inflation rate plus 2%. Following a recommendation by the Rental Housing Task Force, the rent increase was reduced to just the inflation rate. A rent increase freeze was put in place in 2020 and 2021 to support renters during the COVID-19 pandemic. To protect renters from high inflation in 2023, the Province capped rent increases at 2%, well below the 5.4% inflation rate that would have otherwise applied.

“With renters facing a possible rent increase of almost 6%, the government listened to the voice of renters and acted, and I’m so glad they have,” said Spencer Chandra Herbert, Premier’s Special liaison for Renters, former chair of the Rental Housing Task Force and MLA for Vancouver-West End. “We also know people renting out homes are facing increased costs and want to make sure they continue to make places available for long-term renters.”

The 2024 maximum allowable rent increase is significantly less than what it would have been prior to changes made by the Province in 2018 that limited rent increases to inflation. As inflation returns to normal levels, the Province intends to return to an annual rent increase that is tied to B.C.’s Consumer Price Index in future years. Under the previous government, maximum rent increases could include an additional 2% on top of inflation. This change has saved families hundreds of dollars.

Since 2017, the Province has taken steps to better protect renters, including banning illegal renovictions and strengthening the financial penalties for landlords who evict tenants in bad faith. A renoviction is an eviction that is carried out to renovate or repair a rental unit.

In addition, government provided the Residential Tenancy Branch (RTB) with $15.6 million in additional funding to improve services and reduce delays. The capacity of the RTB’s Compliance and Enforcement Unit was also increased to allow for earlier interventions and to eliminate the need for hearings in the first place.

Quick Facts:

If a landlord served a tenant with a Notice of Rent Increase that takes effect in 2023 using the 2024 annual allowable rent increase, it is null and void and the tenant does not have to pay it. They must follow the set rent increase for 2023.
The maximum allowable rent increase is defined by the 12-month average per-cent change in the all-items Consumer Price Index for B.C. ending in July the year prior to the calendar year for which a rent increase takes effect.
For example, if a rent increase takes effect in 2025, the maximum allowable rent increase is the 12-month average per-cent change in the all-items Consumer Price Index for B.C. ending in July 2024.
The 2024 maximum increase for manufactured-home park tenancies will be 3.5%, plus a proportional amount for the change in local government levies and regulated utility fees.
The rent increase does not apply to commercial tenancies, non-profit housing tenancies where rent is geared to income, co-operative housing and some assisted-living facilities.

Angela Calla is an 19-year award-winning woman of influence which sets her apart from the rest. Alongside her team, Angela passionately assists mortgage holders in acquiring the best possible mortgage. Through her presence on “The Mortgage Show” and through her best-selling book “The Mortgage Code“, Angela educates prospective home buyers by providing vital information on mortgages. In light of this, her success awarded her with the 2020Business Leader of the Year Award.

Angela is a frequent go-to source for media and publishers across the country. For media interviews, speaking inquiries, or personal mortgage assistance, please contact Angela at hello@countoncalla.ca or at 604-802-3983.

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Bank of Canada to hold rates steady on Sept. 6; home prices to fall in 2023: Reuters poll

General Angela Calla 30 Aug

BENGALURU, Aug 30 (Reuters) – The Bank of Canada is expected to hold its key interest rate steady at 5.00% on Sept. 6 and stay at that level through at least the end of March 2024, according to a majority of economists in a Reuters poll, with a small but growing minority expecting one more rate rise.

Inflation, which the Canadian central bank targets at 2%, rose more than expected to 3.3% in July, and further price rises continue to be the upside risk to expectations the BoC has already reached its terminal rate.

The housing market, where prices surged about 50% during the coronavirus pandemic and have fallen only about 10% from their peak, is also showing signs of a revival, with forecasters in a separate Reuters poll raising price expectations for this year.

For the time being, an expected slowdown in economic growth to 1.1% in the second quarter and a rise in the jobless rate gives Bank of Canada policymakers plenty of room to leave interest rates unchanged next week.

Thirty-one of 34 economists polled Aug. 24-30 expect no change to the central bank’s overnight rate (CABOCR=ECI), with the remaining three expecting a 25-basis-point rise. Interest rate futures are pricing in no change next week, but are nearly split over whether rates rise once more.

“Our base case call at the moment is for them to keep the overnight rate steady at 5.00% … (and) throughout the rest of this year,” said Claire Fan, an economist at RBC.

Fan pointed out that by the October meeting, policymakers will have two more job market and inflation reports to consider.

In the latest poll, eight of 34 economists expect one more rate rise to 5.25% by the end of this year, compared with only one in a July poll. In response to an additional question, 60% of respondents, 12 of 20, said the risk of the central bank raising rates once more from the current level was high.

“We expect the Bank will hold the overnight rate steady at 5.00% through mid-2024 as the full impact of past rate hikes helps push the economy into a moderate recession. Still, additional BoC rate hikes are possible if economic growth is stronger than we anticipate,” said Tony Stillo, the director of Canadian economics at Oxford Economics.

A majority of economists, 24 of 34, expect the central bank will keep its policy rate at the current level or higher until at least the end of March 2024. The median shows 50 basis points worth of cuts by the end of June next year, in line with expectations for the U.S. Federal Reserve.

A scenario in which Canadian interest rates stay higher for longer could increase pressure on highly-indebted households, with almost 20% of Canadian mortgages due for renewal next year.

The Aug. 14-29 poll of 13 property analysts forecast average home prices would fall 5.0% this year, less severe than the nearly 9% drop expected just three months ago. Analysts expected a 12% fall in home prices at the beginning of the year.

“We’re not anticipating further rate increases from the Bank of Canada, but that threat alone is enough to keep buyers on the sidelines for the rest of this year,” said Sal Guatieri, senior economist at BMO Capital Markets.

“It won’t be until early next year … when it becomes clear the bank’s next move is to lower rates, that we’ll see the housing market strengthening once again.”

The prospect of higher mortgage repayments on ever-more expensive property, along with record immigration, is expected to drive further demand for rentals.

When asked what will happen to average rents for the rest of 2023, all 10 analysts said they would either rise slightly (5) or rise significantly (5). A majority of analysts also said rental affordability would worsen over the coming year.

“I think rents will continue to rise across Canada because of the shortage of housing that we’re seeing and the underlying sturdy demand,” BMO’s Guatieri said.

(courtesy of reuters.com)

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Tax-Free Gifting to your Children with a Reverse Mortgage

General Angela Calla 30 Aug

Rising house prices and interest rates make it more challenging for young Canadians to start families, own homes, or save. Parents often step in to help, with 35% of first-time buyers receiving financial assistance in a lump sum payment toward their purchase, while 25% of buyers received support on their monthly mortgage payments. HomeEquity Bank offers CHIP Reverse Mortgage solutions for Canadians aged 55+ to leverage home equity to help their adult children.

How can us as Mortgage brokers help parents give their children a leg-up in today’s economic climate?

The Reverse Mortgage can help parents provide a tax-free gift to their children. Let’s take Robert and Jonathan as an example.

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Weaker Than Expected Jobs Report Portends No Rate Hike By BoC

General Angela Calla 9 Aug

The Long-Awaited Labour Market Slowdown

The Canadian economy shed 6,400 jobs in July, far weaker than the 25,000 gain that was expected. The jobless rate was 5.5%, the third consecutive monthly rise. This likely improves the chances the Bank of Canada will remain on the sidelines in September.

Wage inflation, however, re-accelerated, moving back to 5.0%. This, combined with the continued stickiness in core inflation, will keep interest rates high for longer.

July’s data follows a surprise gain of 59,900 in June and a 17,300 loss in May, showing that employment is a notoriously volatile series. Nevertheless, it provides the fodder for Macklem to pause again after two consecutive rate hikes.

A downturn in June’s manufacturing, wholesale, and retail data has buoyed the Bank’s hopes that the 475 basis point rate hikes have slowed the economy, especially as preliminary figures for June showed the economy contracting for the first time this year. Inflation rates for the same month moderated to 2.8%, fitting within the central bank’s target range for the first time since March 2021.

Policymakers scrutinize indicators to determine if the current interest rates are sufficiently high to temper economic growth. They perceive substantial wage increases as inconsistent with their goal of reducing inflation to the 2% target. Even amidst recent significant strikes from workers demanding improved remuneration, the outlook hints at a potential slowdown in wage growth. This could be driven by increased immigration, which expands the workforce while the demand for labour diminishes.

Bottom Line

The chances of a rate hike on September 6 have diminished significantly. However, more data is yet to come with July inflation on August 15 and the Q2 GDP figure on September 1.

(Courtesy of Dr. Sherry Cooper –Chief Economist, Dominion Lending Centres)

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August 2023 Monthly Newsletter

General Angela Calla 9 Aug

This month we are covering what you need to know about converting your basement into an income suite, plus we have some fun summer BBQ tips! Also, hear the economic forecast straight from our Chief Economist, Dr. Sherry Cooper!

Converting Your Basement to an Income Suite

With the current interest rates and economic scenarios, many Canadians may be looking for ways to bring in some extra cash. One option for this is to put your home equity to work and consider renovating your basement into a legal income suite!

You can do this by using a secured credit line (home equity line of credit or HELOC) to help fund the upfront cash to make changes to your home.

A few things to consider before you invest in renovating to create an income suite include:

Zoning: Before looking into doing anything with an income suite, always double-check if you are zoned accordingly for a smooth renovation. If your zoning does not allow for secondary suites, see if you can rezone.

Local Regulations: Depending on your location, there may be particular regulations that you need to follow or be aware of regarding your suite.

A few examples of how the regulations can differ between provinces or cities include:

In Coquitlam, you cannot have a suite that is more than 40% of the main house floor plan. You are also required to offer a parking spot for tenants.
In Kelowna, you can only have one secondary suite and the home must have an “S” designation.
In Calgary, updated zoning legislation has now made it easier to add income suites.
Toronto has also proposed reforms that will make it easier to add suites.
In Montréal, anyone carrying out a project involving the addition of at least 1 dwelling and a residential area of ??more than 450 m² (equivalent to approximately 5 dwellings) must enter into an agreement with the City of Montréal in order to contribute to the supply of social, affordable and family housing. It can be a new building, an extension, or the conversion of a building.

Visit the official municipal websites or consult local building departments to obtain accurate and up-to-date information on the rules and requirements in your area BEFORE getting started.

Insurance & Legal Considerations: Before adding your secondary suite, ensure that you have proper insurance coverage or the ability to add additional coverage to protect both the primary residence and suite. In addition, you will want to consult a lawyer and draw up a tenant or rental agreement for any potential tenants. Ontario has a mandatory standard lease agreement that all landlords must use.

Unit Layout and Design: If the zoning and regulations in your area allow you to build an income suite, the next steps are to look at the suite layout and dimensions. Confirm any size restrictions or minimum ceiling height requirements as you are laying out the design for the unit.

The unit should have, at minimum the following:

A separate parking space for the renter.
A separate entrance, kitchen, bathroom, and living/sleeping areas.
Ventilation and soundproofing measures to enhance livability.
Consideration of natural light.
Interlink smoke detectors for primary and secondary residences.
Separate, independently-controlled ventilation and heating system.
Proper drainage, sewage connections, and utility separations.
Outlets, circuits, and lighting that meet electrical code requirements.

Ensure that however your income suite is designed, you are hiring the appropriate building, plumbing, and electrical experts to ensure your suite is up to code and avoid any potential disasters.

Building & Trade Permits: Once you have confirmed that you are properly zoned and able to add an income suite and understand all the regulations for your area, you will want to draft your blueprints and submit a permit application, along with the fee, before you get started. For instance, in B.C. you are required to have a Building Permit for any suite to be considered legal.

IMPORTANT: Even if you are not required to have a building permit, it is important to get these permits for other aspects including insurance coverage should anything happen. Having a building permit will help protect your investment.

In addition to your building permits, you will need to get permits for any plumbing, electrical, and gas renovations prior to beginning your work.

Inspections & License: Once you have your permits and have begun construction, make sure you understand what inspections are required throughout the process and you schedule them accordingly with local authorities to ensure compliance with building codes, fire safety standards, and health regulations.

If the work meets all requirements, your suite will be approved. The last step is determining if you need a business licence. This is not required if your family (parents, children, etc.) will be living in the suite. In Vancouver, for example, if you intend to rent out your suite long-term, you DO need a license. Be sure to check any rules on this in your area.

Beyond the ability to earn extra income per month, there are a few additional government incentive programs when it comes to suites including:

First Nations: If you live on a First Nations reserve, you may be eligible for federal funding that will provide up to $60,000 to help you build an inexpensive secondary suite rental linked to your principal home. If you live in a northern or remote area, this amount is increased 25%. This is a 100% forgivable loan that is not required to be paid back assuming all guidelines are followed.
Residential Rehabilitation Assistance Program (RRAP) – Secondary and Garden Suites: This program is open to all First Nations or individual First Nation members, particularly those who own a family home that can be converted to include a self-contained suite for a senior or adult with disability.
Multigenerational Home Renovation Tax Credit: A credit for a renovation that creates a secondary unit within the dwelling to be occupied by the qualifying individual or a qualifying relation. The value of the credit is 15% of the lesser of qualifying expenditures and $50,000.
British Columbia: Beginning in early 2024, BC homeowners will be able to access a forgivable loan of 50% of the cost of renovations, up to a maximum of $40,000 over five years, for income suites.
Ontario: There are multiple secondary suite programs throughout Ontario, depending on your region. These loans provide $25,000 to $50,000 in funding and are forgivable assuming continuous ownership for 15 years.

While it is important to look online and do your research. Your best resource will be visiting local authorities at the “City of” to confirm that you completely understand the considerations before moving forward with implementing an income suite.

Best Summer BBQ Tips

It’s the season of outdoor parties and a summer BBQ is the perfect way to enjoy time with friends and family!

For some tips on how to make this year’s get-together your best one yet, check out my list below:

Set the Mood: String up fairy lights, plug in a radio with some of your favourite tunes in the background, put out a lawn rug, and throw a fresh tablecloth over your outdoor dining area. A few quick items can really spruce up the yard and make it feel ready for guests!
Don’t Forget to Play! If you’re hosting an adult-only BBQ, setting up a table for a card game or getting out your cornhole boards can be a great way to pass the time and get in some laughs. If you have children in attendance, consider setting up a lemonade stand or fill some water balloons for an extra splash!
Choose Your Mains: It can be easy to get carried away grilling steaks, fish, chicken, hot dogs, burgers – you name it! For a more successful party, choose two options. Maybe you go with hot dogs and veggie burgers, or perhaps fish and chicken. Choose items that cook well on the BBQ together and suit the tone of your get-together.
Have Drinks on Hand: Set up a table with pitchers of fun summer drink concoctions (alcohol optional!) or consider filling a kiddie pool or wheelbarrow with ice to keep those beers chilled all afternoon.
Put Out Snacks: This may seem like a no-brainer, but having a table filled with fun ‘grazing’ snacks can help stave off any stress about perfectly grilling your meals! Try a veggie and dip tray, fruit shish kabobs, or a charcuterie board of cured meats and cheeses.

Economic Insights from Dr. Sherry Cooper

The Bank of Canada remains staunch in its battle against inflation, utilizing its primary weapon—the overnight policy rate—which has escalated from 25 basis points to 500 bps since March 2022.

This historically low overnight rate was a direct consequence of the COVID-19 pandemic and implementing measures to cushion the economic impact of the lockdowns. These initiatives included reducing the policy rate from 1.75% to 0.25%, postponing mortgage payments, providing financial support to businesses for workforce maintenance, and compensating individuals for home quarantine. These measures, amongst others, reignited the economy upon the widespread availability of the vaccine.

The Canadian economy bounced back robustly once commercial activities resumed. Employment rates rocketed, and unemployment plummeted to all-time lows. However, the recovery faced a setback when Russia invaded Ukraine in February 2021, which caused supply constraints, and substantially increased energy and food. Despite the soaring inflation, central banks were initially hesitant to take action.

In hindsight, we now know the necessity for initiating interest rate hikes by mid-2021. Instead, this action was postponed until March 2022.

Furthermore, the Bank of Canada and other significant central banks inundated the financial system with surplus liquidity by purchasing government bonds. This quantitative easing tactic made capital not only more affordable but also readily available, sparking an unprecedented boom in the housing market.

Many exploited the record-low rates of 2020 and 2021 by opting for variable-rate loans due to their lower costs. At its zenith, variable-rate mortgages (VRMs) accounted for 57% of all loan originations. These loans are due for renewal in 2025 and 2026. However, most of these loans have reached their trigger points and are negatively amortizing, barring substantial lump-sum payments by borrowers.

For those who chose adjustable-rate loans, monthly payments increased with every Bank of Canada rate hike. Delinquency rates, for the time being, remain impressively low within the prime space, though they are beginning to rise among alternative lenders.

After reaching a zenith of 8.1% in June 2022, inflation has slowed to 2.8% in June of this year. Regardless, the Bank of Canada continued its trend of interest rate hikes following a brief hiatus in its last two meetings, with speculation of another hike in September. The Bank has provided a buffer period for itself by projecting a return to the 2% target inflation rate by mid-2025—a considerably more extended period than initially anticipated.

The recent rate hikes and moderated expectations appear prudent considering the Bank’s preference for mitigating inflation over preventing a recession. It is improbable that the Bank of Canada will reduce interest rates this year.

Although the policy rate is projected to decrease in the first half of 2024, it is not expected to return to the pre-COVID level of 1.75%. Negative real interest rates (the actual market rate minus the 2% inflation rate) are unlikely to occur, barring a global economic meltdown.

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The Canadian Mortgage Market is at the Precipice of an Evolutionary Shift

General Angela Calla 27 Jul

The Canadian mortgage market is at the precipice of an evolutionary shift as it ventures into a post-pandemic environment.

With the 2023 Residential Mortgage Industry Report from the Canada Mortgage and Housing Corporation (CMHC) now available, CMHC 2023 Residential Report

a roadmap has been provided for the mortgage industry moving forward, outlining crucial insights into future prospects for real estate professionals of all stripes.

An important trend emerging from the report is the prominent ascent of non-bank lenders, a significant factor contributing to a transformative shift in the mortgage landscape. These lenders have been increasing their hold on the market share thanks to their competitive rates and flexible terms, which cater to a broad spectrum of borrowers. As these non-bank entities continuously innovate and remodel themselves to cater to dynamic consumer needs, we foresee them becoming progressively influential players in the mortgage arena.

Another central agent of change in the mortgage industry is the emergence of new technology, including AI. The CMHC report underscores the growing role of digital platforms in the mortgage approval process. This trend, catalyzed and expedited by the pandemic, has streamlined the mortgage process, making it quicker, more efficient, and, importantly, more accessible for borrowers. In the future, we envisage technology taking further leaps, with artificial intelligence and machine learning assuming a crucial role in risk evaluation and decision-making.

Government policies will invariably persist in molding the future shape of the mortgage market. The government’s pandemic response significantly impacted mortgage lending practices, especially its provisions to buttress homeowners and stimulate the housing market. As we navigate the road ahead, we expect government policies to keep pace with fluctuating market conditions, emphasizing stability and mitigating potential risks.

Though the Bank of Canada chose to pause rate hikes earlier in 2023, there has been growing speculation that increases in lending rates could be on the way. As the conditions the BoC laid out for pausing the rate hikes are no longer being met due to stronger-than-expected GDP numbers and an increasing inflation rate, we could expect another rate hike by the end of the year. That said, the overall outlook for the remainder of the year will likely be contingent on regional conditions, with smaller, presently affordable markets likely to maintain their stability.

Nevertheless, these shifts are not devoid of challenges. The growing presence of non-bank lenders and the mounting reliance on technology in the mortgage process could inadvertently lead to an increased risk quotient in the housing market. Regulatory bodies must keep a close watch on these developments and stand ready to intervene as needed to uphold market stability.

In conclusion, the future of the Canadian mortgage market will likely be sculpted by intensifying competition, rapid technological advancements, and flexible government policies. As we traverse this ever-changing landscape, it will be vitally important for borrowers to stay informed and collaborate with trusted professionals to make prudent decisions for their financial future. With an increasingly complex and dynamic mortgage industry landscape, we are on the cusp of an era that could define the future of housing finance in Canada for years to come.

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How Homeowners Are Coping With Raising Interest Rates When Renewing Mortgages

General Angela Calla 24 Jul

PUBLISHED JULY 21, 2023 UPDATED JULY 22, 2023

With the Bank of Canada’s latest interest rate hike in July, life keeps getting more expensive for those with a mortgage.

Angela Calla, mortgage broker at Dominion Lending Centres in Vancouver, notes that regardless of income level, having to qualify at interest rates that are 4 or 5 percentage points higher than when a homeowner first got their mortgage is certainly a pressure cooker. She recently shared her thoughts with Globe Advisor on strategies for how her clients are coping.

What things do you advise clients to consider at mortgage renewal time?

With another hike looming in the fall, anybody who has a renewal upcoming in the next year shouldn’t wait to secure a rate to protect themselves and minimize their payment shock.

They also need to consider if they want to move up the property ladder in the future or have outside debts. The mortgage renewal is the optimal time to review your options because there’s no penalty.

If they live in a strata property, they want to make sure that they have no assessments coming up. It’s essential for them to take out the money to have in an emergency fund for that. We’re seeing a lot of people getting hit with assessments on their condos for certain items such as roofs. That can be detrimental to people on a fixed income in these high inflationary times and even at the best of times. If they need to break their mortgage down the road, then they’re looking at a penalty. In the middle of an assessment, lenders don’t look at these properties favourably.

What are your clients doing to manage the rate increases?

Some people who are experiencing the largest increases are using a reverse mortgage. They’re getting these because they don’t want to take their money out of investments and pay taxes on them. They already feel like they may not be prepared for retirement with the increase in inflation. It’s been common for them to take a three- or five-year term to help things as they settle.

Some are putting their emergency funds in a high-interest saving account paying more than 5 per cent. So, instead of paying property taxes with their mortgage or pre-paying their mortgage, they’re putting those funds aside in their emergency funds.

Some are extending their amortization to give them some time until rates come back down. Some want to sell and rent but the problem is there’s no product to rent.

What’s your overall outlook that you share with clients who are finding it tough to cope?

I tell my clients that anything they do right now is specific to this time in the market and specific financial circumstances. It can always be modified and changed when other things change down the road.

This interview has been edited and condensed. This is Globe Advisor’s weekly newsletter for professional financial advisors, published every Friday.

– Deanne Gage, Globe Advisor reporter

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Multigenerational Home Renovation Tax Credit

General Angela Calla 19 Jul

For the 2023 and subsequent taxation years, Budget 2022 introduced the Multigenerational Home Renovation Tax Credit (MHRTC), a refundable credit to assist with the cost of renovating an eligible dwelling to establish a secondary unit that enables a qualifying individual (a senior or an adult who is eligible for the disability tax credit) to live with a qualifying relation. The credit is available for qualifying expenditures made or incurred after December 31, 2022, for services performed or goods acquired after that date.

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CPI Inflation Falls To 2.8%–Inside the BoC’s Target Range

General Angela Calla 19 Jul

Canadian Inflation Falls Within Bank of Canada’s Target Range; Food and Shelter Costs Remain High

June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.

Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June.

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress.

Bottom Line

It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.

(Courtesy of Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres)

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Bank of Canada Hikes Policy Rate By 25 BPs to 5.0%–Highest in 22 Years

General Angela Calla 13 Jul

Interest Rates Will Stay Higher For Longer

The Bank of Canada increased the overnight policy rate by 25 basis points this morning to 5.0%, its highest level since March 2001. Never before has a policy action been so widely expected. Still, the Bank’s detailed outlook in the July Monetary Policy Report (MPR) suggests stronger growth and a longer trajectory to reach the 2% inflation target. The Bank of Canada believes the economy is still in excess demand and that growth will continue stronger than expected, supported by tight labour markets, the high level of accumulated household savings, and rapid population growth. “Newcomers to Canada are entering the labour force, easing the labour shortage. But at the same time, they add to consumer spending and demand for housing.”

The Bank forecasts GDP growth to average 1.0% through the middle of next year–a soft landing in the economy. “This means the economy moves into modest excess supply in early 2024, and this should relieve price pressures. CPI inflation is forecast to remain about 3% for the next year, before declining gradually to the 2% target in the middle of 2025.” This is about six months later than the Bank expected in April. This means that high-interest rates remain higher for longer.

While Canadian inflation has fallen quickly, much of the downward momentum has come from lower energy prices and base-year effects as large price increases last year fall out of the year-over-year inflation calculation. We are still seeing large price increases in a wide range of goods and services. Our measures of core inflation—which we use to gauge underlying inflationary pressures—have come down, but not as much as we expected.

There continue to be large price increases in a wide range of goods and services. Measures of core inflation have come down, but by less than expected (see chart below). One measure of core inflation–which removes food, energy and shelter prices, remains elevated and will likely continue to be sticky.

To remove base effects, the Bank looks at three-month rates of core inflation, which have remained at 3.5% to 4.0% since September 2022, almost a percentage point above the Bank’s expectations at the beginning of this year.

In addition, labour markets remain tight. Although the jobless rate has risen to 5.4%, that is still low by historical standards. The unemployment rate was at 5.7% when the pandemic began, which was considered close to full employment at the time. Job gains have been robust, with about 290,000 net new jobs created in the first six months of 2023. Many new entrants to the labour market have been hired quickly, and wage growth has been about 4% to 5%.

The faster-than-expected pickup in housing resales, combined with a lack of supply, has pushed house prices higher than anticipated by the Bank of Canada in January (see chart below). According to the MPR, “the previously unforeseen strength in house prices is likely to persist and boost inflation by as much as 0.3 percentage points by the end of 2023, compared with the January outlook.”

Bottom Line

As always, the next steps by the Bank of Canada will be data-dependent. Interest rates will remain higher for longer if the Bank is correct that inflation will not reach its 2% target until 2025. We also cannot rule out more rate hikes in the future. This morning, the US inflation data for June were released, showing a marked decline from 4% in May to 3% in June. Markets rallied worldwide, taking Canadian bond yields down despite the BoC tightening. The hardship caused by the continued rise in mortgage rates is already evident. OSFI recently announced the possibility of higher capital requirements for federally insured financial institutions on mortgages with loan-to-value ratios above 65% that have unusually high amortizations. This proposal is now out for consultation. It seems OSFI and the federal consumer watchdog are working at cross purposes.

(Courtesy of Chief Economist, DLC – Dr. Sherry Cooper)

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