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Tag: Bank of Canada

  • Economists expect inflation rate ticked up above 3% last month amid higher gas prices – MoneySense

    Economists expect inflation rate ticked up above 3% last month amid higher gas prices – MoneySense

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    At the same time, Macklem has stressed that the central bank does not want to cut interest rates prematurely and therefore will wait until there’s clearer evidence that inflation is headed back toward the bank’s 2% target soon.

    “This would be exhibit A from the (central) bank’s library as to why we have to be cautious,” said BMO chief economist Douglas Porter. 

    The Bank of Canada has held its key interest rate steady at 5% since July, waiting for more evidence that inflation is getting closer to 2%.

    Its last projection suggested inflation would reach that target in 2025, a forecast many economists share.

    Porter says one source of uncertainty in these forecasts comes from energy prices, which typically have a significant effect on overall inflation.

    “Oil prices can move mightily rapidly, and make a lot of inflation forecasts look pretty foolish,” he said.

    Tuesday’s report will be the last inflation reading ahead of the Bank of Canada’s April interest rate announcement, which Porter called a “critical decision.”

    When might interest rates come down?

    Although the central bank is not expected to change its policy rate next month, many forecasters anticipate it will do so at the following decision meeting in June. 

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    The Canadian Press

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  • Making sense of the Bank of Canada interest rate decision on March 6, 2024 – MoneySense

    Making sense of the Bank of Canada interest rate decision on March 6, 2024 – MoneySense

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    As a result of the latest rate hold, the prime rate in Canada will remain at 7.2%. This might not seem like big news, but this is what lenders, from the Big Five Banks to other financial institutions, use to underpin their variable borrowing product pricing.

    That the BoC would stick to the status quo was widely expected by market analysts and economists. A lower-than-expected January 2024 inflation reading of 2.9% took further pressure off the central bank, allowing it to continue its wait-and-see approach on rates. And, while the year-end gross domestic product (GDP) report came in hot, with a 1% uptick in the fourth quarter of 2023, overall lacklustre economic performance has made a firm case for ending the rate hike cycle. 

    However, the Bank provided no hints as to how long this holding pattern will last. In its announcement, while acknowledging that inflation has solidly declined from its June 2022 peak of 8.1%, the consumer price index (CPI) remains stubbornly above its 2% average with the core measures in the 3% to 3.5% range. (The core measures strip out the most volatile items, like housing and food costs.)

    In its announcement accompanying the rate decision, the BoC’s Governing Council—the panel of economists who set the nation’s monetary policy—made it clear that until sustainable progress is made with the CPI, the Bank of Canada interest rate won’t be going anywhere.

    “The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” states the Bank’s rate announcement release. “[The] Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.” 

    This fifth consecutive hold means key interest rates haven’t changed since September 2023. While that’s led to welcome stability for some, others are feeling the stagnancy. Here’s what the latest rate direction means for Canadians, depending on their financial interests.

    What the BoC rate hold means for mortgage borrowers

    Canadians with variable-rate mortgage terms are the most impacted group affected by the Bank of Canada interest rate hold. Their mortgage payments are based on the prime rate in Canada, as an extension of the overnight lending rate. 

    How the Bank of Canada’s interest rate affects you

    These borrowers in Canada have been walloped by the rate hiking cycle that took place between March 2022 and July 2023. Those with adjustable-rate variable mortgages—which have payments that fluctuate alongside the Bank’s rate moves—had payments soar by as much as 70%, according to the Bank’s own research. Those Canadians with fixed payment schedules, meanwhile, have seen the portion of their payment that goes toward their principal whittle smaller with every rate increase, with some Canadian borrowers even entering negative amortization on their mortgages.

    For all variable-rate borrowers, today’s rate stability offers some welcome relief, though they’re likely disappointed that the BoC didn’t offer a timeline as to when the rate will eventually decrease. And, Canadians shopping for the best mortgage rate, including those looking to renew, are also likely frustrated by the lack of movement. While variable rates remain frozen at last summer’s levels, fixed mortgage rates have seen some slight easing in recent months due to lowering bond yields.

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    Penelope Graham

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  • Bank of Canada holds key rate steady at 5%, says too early to cut – MoneySense

    Bank of Canada holds key rate steady at 5%, says too early to cut – MoneySense

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    That’s because they expect the Canadian economy to weaken further under the weight of decades-high interest rates. 

    Statistics Canada reported last week the economy grew at an annualized pace of 1% in the fourth quarter. But that modest growth was largely due to a surge in exports, rather than a rise in domestic activity. On a per-capita basis, both real gross domestic product and consumer spending fell over the last three months of the year.

    Dawn Desjardins, chief economist at Deloitte Canada, said the Bank of Canada is looking for more progress on inflation before pulling the trigger. 

    “The bottom line is the economy is moving generally in the direction the bank anticipated. And inflation is not quite where they would like it to be,” she said in an interview. 

    Higher interest rates have helped slow the pace of price growth by causing a pullback in spending in the economy. Canada’s inflation rate dropped to 2.9% in January, falling back within the Bank of Canada’s 1% to 3% target range.

    However, rapidly rising housing costs are standing in the way of getting inflation down even lower. In January, shelter prices were 6.2% higher than they were a year ago. 

    The Bank of Canada has continued to point out the outsized effect housing costs are having on inflation. But Macklem said it’s not the sole issue driving the central bank’s decision-making. 

    “Yes, shelter price inflation—it is the biggest contributor to inflation right now. It’s certainly weighing on our decisions,” Macklem said. “Having said that, our target is for total CPI inflation.”

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    The Canadian Press

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  • What to expect for GICs in 2024 – MoneySense

    What to expect for GICs in 2024 – MoneySense

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    The point? If a GIC investor is looking to lock in a good long-term interest rate, they may want to consider some bond exposure as well to diversify. If rates do in fact fall, bonds could do very well.

    Regardless, for a conservative investor, earning a return in the 6% range from a GIC is pretty enticing.

    Tax paid on GIC returns in 2024

    If you’re buying a GIC or bond in a tax-sheltered account, the tax implications do not matter. Interest income in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) is tax-free, although RRSP withdrawals are eventually taxable.

    If you are considering a GIC in a taxable account like a personal non-registered account or a corporate investment account, tax is a factor.

    If an Ontario investor with $100,000 of income earns a dollar of interest income, they pay a marginal tax rate on that dollar of about 31%. So, buying a 6% GIC leaves only about 4.1% after tax.

    If that same investor bought Canadian stocks and earned a 6% return with 2% from dividends and 4% from capital gains, selling after a year, the tax would be less. The tax rate on the dividend income would be about 9% and on the capital gain would be about 16%. The after-tax return would be about 5.2%, over 1% higher than the GIC investor earning the same 6%.

    Depending on the dollar value of the GIC or stock, the income could push the investor into a higher tax bracket than the marginal rates referenced above, but the outcome would be similar, with stocks being more tax efficient. The tax savings for stocks over GICs would also apply in other provinces.

    As a result, a stock investor could earn a lower rate of return than a GIC investor in a taxable account and still keep more of their after-tax return. Stocks generally return more than GICs or bonds over the long run, despite the year to year volatility. This is an important consideration for a GIC investor when tax is considered. After all, it is your after-tax return that really matters.

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    Jason Heath, CFP

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