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Mortgage Minute 9: Inflation-Post COVID

This week the bank of Canada made its fourth rate announcement of the year. The bank left the overnight rate unchanged yet again, as expected. It did provide somewhat encouraging thoughts on the state of the Canadian and global economy and it also updated its outlook on inflation.

Here are a few of the things the bank told us this week.

Gross domestic product growth in the first quarter of 2021 came in strong at 5.6%. This is lower than they had originally projected, but they did tell us that the underlying details indicate rising confidence and resilient demand. They told us that household spending has been stronger than expected. They told us that inventories with businesses are going down and they’re having to import more things.

Additional lockdowns due to COVID-19 have had some recent job loss, and have slowed down some of the data for the second quarter which we are still in.

Generally what we’re looking for from these bank of Canada announcements is an idea for inflation and interest rate projections. Unless your head has been in the sand, you have experienced the inflation we are seeing in the economy right now the bank has a target of inflation between 1 to 3%. We are at the upper end of that. The bank expects us to stay near the upper end of that throughout the summer with it easing off later in the year. When inflation remains near the upper end of the target, that is when we start to see policy interest rates increase.

In the announcement six weeks ago, the bank previously told us that they are not interested in increasing the interest rate until such time as we have sustained inflation near the upper end of the target. What we are seeing now is expected to be shorter term.

Globally we are seeing COVID-19 cases falling in many countries as vaccine coverage increases. This is expected to go hand-in-hand with an uptick in global economic activity. Our neighbours to the south in the United States are experiencing strong consumer driven recovery and we’re also starting to see a similar rebound take shape in Europe. Some emerging economies where vaccination rates are lagging, are seeing a resurgence of the virus and by extension of their economies are continuing to struggle.

I know we talk a lot about COVID-19. There continues to be uncertainty about the evolution of some of the COVID Variants. However the bank of Canada still expects our economy to rebound strongly and they expect that to be led by strong consumer spending.

With respect to the housing market, the bank’s only comment was that activity is expected to moderate but remain elevated.

As I’m sure you have seen in the media, real estate activity has been higher than anticipated. Alberta has seen a lot of property value lost since 2014 come back. Although some segments of the market like condos and town houses have not experienced the same increase in value, single-family homes, especially in desirable neighborhoods, have seen most or all of the value from 2014 return. Anybody who has purchased their home in the last few years will be pleased with the increased value in their homes.

As far as projections into the future are concerned, we clearly don’t know what will happen. The Bank of Canada notes that there still remains considerable excess capacity in the Canadian economy and that the economy still requires extraordinary monetary policy support. The bank has re-committed to holding its low rate for quite some time. They have indicated that until 2% inflation is sustainably achieved they don’t expect any increases and that the earliest they would expect increases would be in the second half of next year. In the meantime the bank continues to inject about $3 billion a week into our economy.

The big takeaway today is that no news is good news. The bank has changed nothing. This is still a good time to borrow with rates low and the ability to lock in low rates for an extended period of time. If you have any questions, please feel free to reach out to me.



June 11, 2021


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