Jumbo Rate Cut by the Bank of Canada.

Bank of Canada Cuts Policy Rate By 50 BPS

After three consecutive 25 bp rate cuts, the BoC slashed the overnight rate by 50 bps this morning, bringing the policy rate down to 3.75%. The market had priced in 90% odds of a 50 bp move, where consensus coalesced. The combined slower-than-expected GDP growth and back-to-back weak inflation reports solidified the calls for a more significant move. The output gap continues to widen, countering the BoC’s forecast in July, pointing to an even more subdued inflation forecast. A 50 bp cut helps to offset that forecast miss by improving growth prospects faster. Even at 3.75%, monetary policy remains restrictive, as the chart shows below. The overnight rate is 145 bps above the September core inflation measure, and headline inflation moved below the 2% target.

We expect the policy rate to fall to 2.50% by the spring of next year. This morning’s 50 bp cut reinforces speculation of another 50 bp move in December. However, the Bank will likely need to see continued weak economic data and low inflation to prompt another big move. Wage growth remains stubbornly strong, and there might be some lingering concern about reigniting the housing market, especially with mortgage insurance rules poised to change on December 15.

However, the Bank pointed out that lower rates will trigger a rebound in the housing market. According to the Monetary Policy Report (MPR), “Resales and renovations are anticipated to recover as interest rates decline. Renovations should also be supported by a projected rise in house prices. Recent changes to government mortgage insurance rules are expected to bolster housing demand. Although population growth should ease, the level of demand is expected to remain robust and support new construction. Lower interest rates may also facilitate some increase in housing supply by easing financing costs. However, constraints on the amount of land available for new homes, zoning restrictions and a lack of skilled labour are expected to limit the pace of construction, particularly over the near term. As a result, growth in housing demand is expected to outpace increases in supply. Unlike other sectors of the economy that are experiencing excess supply, the housing market is projected to remain tight. House prices are expected to rise, but the pace of increases will likely be restrained because some home buyers will face affordability challenges”.

Effective tomorrow, the prime rate will fall to 5.95%, lowering floating-rate mortgage rates. According to Mortgage Logic News, the lowest nationally advertised 5-year fixed rate is down 10 bps this week to 4.09%.

In its policy statement, the Governing Council reduced its forecast for growth in the second half of this year to 1.75%. Third-quarter GDP growth was revised to 1.5% from 2.8% in the July MPR. Inflation has improved faster than expected, ending the year at 2.1%, with core inflation at 2.3% and falling further in 2025.

Bottom Line

Today’s action is great news for the Canadian economy and housing activity. Market participants are now expecting home resales to pick up sharply in the first quarter of next year. The coming spring housing season should be robust, boosting sales and prices.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Smart Ways to Cut Your Energy Costs.

In the last decade, climate change and energy efficiency have become top of mind for many Canadians. From wanting to do our part by recycling to making our home as energy efficient as possible, there are so many benefits to being environmentally and energy conscious.

If you are looking to cut costs or simply want to reduce your eco-footprint, here are some great ways to cut your energy costs:

• Get a Smart Thermostat: A pretty easy installation, a smart thermostat can help you better manage your in-home temperature. Whether you opt to install a basic programmable thermostat or try Google’s Nest, which learns from you and works to predict which temperatures you prefer and when, getting a read on your in-home temperature can help you better manage your energy usage.
• Look for Drafty Spots: When it comes to heating your home, it can quickly become a wasted effort and results in extra costs if you have drafts in your home. In addition to windows and doors, you should also seal any folding attic stairs, add a fireplace plug to seal the damper and install a dryer vent seal to reduce drafts in your laundry room.
• Swap to LEDs: Most of us are already using LED bulbs throughout our home. If you aren’t yet, now is the time to make the switch! LED bulbs use 15% less energy than an equivalent incandescent, which can save you a ton of money each month especially in larger homes.
• Turn Down Your Water Heater: While sometimes nothing beats a good scalding shower, you don’t want to be burned with a high energy bill. Did you know if you knock down that temperature gauge by just 10 degrees, you can save 3% to 5% on your bills each month!?
• Examine Your Appliances: Since 1992, ENERGY STAR® has been backing energy efficient appliances and products, helping consumers make the right choices. Some of the least green appliances in your home are your dishwasher, washing machine, dryer and refrigerator and, if you don’t currently have Energy Star certified versions of these machines, swapping to them is a surefire way to reduce your monthly expenses.
• Can’t afford new appliances? Here are some other tips and tricks to help make them more efficient in the meantime:
  • Dishwasher: Use a citric acid-based cleaner in an empty cycle to rid your dishwasher of excess soap and calcium buildup that may be causing your machine to work harder.Washing Machine: Maximize energy by stuffing your machine to the brim whenever possible as washing machines typically use the same amount of energy regardless of load size.

    Dryer: For starters, ensure you are always cleaning out your lint filter to increase air circulation. In addition, keep an eye on the outside exhaust and clean when needed to reduce drying time and save energy.

  • Refrigerator: While most of us are more concerned with the food inside our fridges than the parts, it is important to check your condenser coils. Over time, dirt, food particles and dust can collect and reduce the efficiency. Another tip is to set your refrigerator to 2-3 degrees Celsius.

• Close The Blinds: When the temperature starts heating up, it is important to close the blinds and drapes to prevent the sun from beating in and warming up your home. The excessive heat makes your air conditioner work overtime causing your energy bills to skyrocket.

In addition to the cost savings and environmental benefits of improving your energy efficiency, CMHC also has a rebate available! The CMHC Eco Plus refund can provide a 25% partial premium refund if you’re CMHC insured and buying or building an energy-efficient home! Click here for more details.