PHEW! No Rate Increase

September 2023 Rate Pause. What's to come for Canada?

This is what every Canadian who holds a mortgage was feeling yesterday.

So maybe, just maybe, 10 increases in under 18 months was enough? Time will tell.

What led to the pause and what's next?

Recent second-quarter GDP data showed the economy declined by 0.2% in Q2.

In Q2, the labor market softened, with the unemployment rate rising to 5.5% in July.

The data also showed Canadians are spending less. This is, in part, due to more households facing mortgage renewals which, in many cases, saw their payments jump by $1000+/month.

Less money in Canadian's pockets = less spending.

Less spending =  company's profits drop = higher unemployment.

Basically, the desired effect of the BoC's interest rate increases is finally being seen in the economy.

The Bank's future rate decisions hinge on factors like consumer demand, inflation expectations, wage growth and corporate pricing decisions.

The next rate announcement will be on October 25, following key economic data releases.

Remember, the technical definition of a recession is 2 quarters of 'negative growth'.

So if Q3 shows another economic decline, we will officially be in recession. And there should be no need for another rate increase.

While some of Q3's outcome is dependent on the impact of global factors, what I can see inside Canada on Main Street is that there are more mortgage renewals to come this year - in fact, there are more scheduled mortgage renewals in the second half of the year than in the first.

This means that even more households will see that 40-50% jump in monthly mortgage payment, leading to less consumer spending and higher unemployment. All else remaining equal, a further decline in the economy seems to be on the cards. And again, that's what the BoC will need to see to continue this rate pause.

Written by
Kanga Mortgage

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