Photo by Michelle Spollen on Unsplash
Central bankers are loathe to signal rate cuts after more than two years of relentless rate hikes. The Bank of Canada has not conceded that its efforts to tame inflation have worked. In a series of statements, the Governor of the Bank of Canada says it is prepared to raise rates should inflation reverse its current downward trend. However, the financial markets are clearly coming around to the belief that the Bank will be forced to start slashing rates as early as the first half of 2024. Governor Macklem notes that growth is slowing and the labour market is weakening, giving him every reason to hold the line. However, the Governor did let the cat out of the bag when he stated that mortgage renewals are the primary reason that the bank held its policy rate at 5% at its most recent meeting. The Bank is obviously aware that there is a wave of mortgage renewals coming up in 2024 and 2025 in which current homeowners will experience rate dramatic rate increases from 300 to 500 bps. It is estimated that as much as 60% of outstanding mortgages come up for renewal over the next 2 years. Refinancing at current fixed rates will result in a deep dive in the value of major assets held by Canadians and a significant increase in their cost of living. In fact, it is clear to date, the most important component driving up the cost of living has been financing costs. This is expected to get worse in the absence of rate cuts. 
Implied Probability of Interest Rate Changes, CanadaSource
The current slowdown in the economy and the prospects of a major hit to the mortgage market has been factored into the expected interest rates. For example, given today’s bond prices, there is a 62% probability that the policy rate will be cut by 50bps in June 2024. As the economy slackens further and prior rate cuts continue to take their toll on borrowers, the Bank will be confronted with the need to cut rates to ward off further economic decline. Mudding the waters, the financial media continues to suggest interest rates will be “higher for longer”. No one knows what higher or longer means, but unfortunately it seems to permeate so much of the financial discourse these days. What is more relevant, though, is to note that, along with an inverted yield, the interest futures signify that rate cuts will be starting in 2024. More By This Author:As The Bank Of Canada Searches For The Perfect Rate Conditions
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