Good morning. The Bank of Canada might be going on a run of interest rate cuts – more on that below, along with a record-setting pole vault and upcoming water restrictions in Calgary. But first:
Today’s headlines
- Former border agency official tells MPs she was pressed by senior managers to give false testimony about ArriveCan
- Two former Hockey Canada players accused of sexual assault have signed with the Russian league
- Three Taylor Swift concerts were cancelled in Vienna after a 19-year-old terrorism suspect made a bomb
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Lower, Tiff. Lower...Justin Tang/The Canadian Press
Economy
A guide to rate reductions
Good news hovers on the economic horizon: Bank of Canada policy makers agree that as long as inflation continues to dip, more cuts to interest rates will be coming this year. On the heels of back-to-back cuts this summer, it would be some added relief after one of the most aggressive campaigns of rate hikes on record.
So with interest rates standing at 4.5 per cent, how low might the central bank – and Governor Tiff Macklem – go? And what does that mean for the housing market? Or mortgage renewals? Or the scary number at the bottom of a grocery bill? Globe and Mail readers had questions – and happily, reporters Matt Lundy and Mark Rendell had answers, which they offered up in an online Q&A. Here’s some of what they told readers yesterday.
Q: How will the housing market react to lower interest rates?
Matt Lundy: I wish I had a crystal ball for this one. I’d imagine that lower interest rates will help people get into the housing market, which has been slumping for much of the past two years. Still, it’s tough to envision the type of price escalation we saw from 2020 through early 2022 – effectively, the rock-bottom interest rate era. Also, the Bank of Canada has stressed that interest rates are likely not going back to the meagre levels we’ve seen for the past 15 years. (This will make it tougher for would-be buyers to pass stress tests, for example.) On the rental side, lower rates will probably help get some developments off the ground. In fact, in many parts of the country, housing starts are trending higher. Plus, you have governments trying to encourage homebuilding in various ways.
Q: Has the BofC looked at the economic impact of mortgage renewals in 2025 and 2026?
Mark Rendell: Canada is facing something of a mortgage renewal wall over the next two years. So far, only around half of all homeowners with mortgages have seen their monthly payments rise since the BoC started raising rates in 2022. The other half will see their mortgages reset over the next two years, and many are in for a shock, having taken out large mortgages to get into the market in 2020 and 2021. That could have an impact on overall economic activity, as households need to put more money toward servicing their debt, leaving them with less to spend on other goods and services. However, BoC officials tended to downplay the risk this poses to overall economic growth, which they see picking up over the next two years.
Q: Should we be worried about the possibility of higher inflation in coming months or are we out of the woods?
Rendell: The inflation genie isn’t entirely back in the bottle – but we’re getting there. The latest Consumer Price Index numbers showed the annual rate of inflation was running at 2.7 per cent in June, down from a peak of 8.1 per cent in mid-2022. Inflation remains sticky in parts of the service sector, especially for services whose prices are closely tied to labour costs. Housing-related inflation – think rents and mortgage interest costs – remains worryingly high. But there are also signs that headline inflation will continue trending lower. Goods price inflation has dropped considerably and wage pressures are easing. At a high level, the overall balance between supply and demand is showing a negative “output gap,” which suggests further downward pressure on prices.
These homes are still pricey.COLE BURSTON/The Canadian Press
Q: What’s the correlation between interest rates, inflation and wages? Does one go up when the others do?
Rendell: Inflation is driven by a number of factors, but one source is a tight labour market and rising labour costs. In effect, companies sometimes raise their prices to cover the rising wages they’re paying employees. If this happens economy-wide, it can feed into inflation, which in turn may necessitate higher interest rates. This dynamic is one reason the BoC is so focused on labour market tightness, which it assesses based on a number of metrics, such as the unemployment rate and job vacancies. For most of the past year, the BoC has said that wages are growing too fast to be compatible with 2 per cent inflation. It’s not a message workers like to hear, and unions have criticized the central bank for what they perceive as anti-worker rhetoric. But many economists would agree with the BoC that it’s hard to achieve 2 per cent inflation if average wages are growing at 4 or 5 per cent unless you also have a big increase in productivity – that is, output per worker.
Q: Is the Bank of Canada concerned with the low productivity levels in Canada?
Lundy: The central bank is absolutely concerned about this. Senior deputy governor Carolyn Rogers gave a speech earlier this year saying that Canada had a productivity “emergency.” From a central banking perspective, “increasing productivity is a way to protect our economy from future bouts of inflation without having to rely so much on the cure of higher interest rates,” she said.
Q: How likely is the BoC to cut by half a point in September?
Lundy: I’d say it’s quite unlikely the BoC cuts by half a percentage point. Their communications, along with recent economic data, suggest another 25-basis-point cut is coming next month, a view that is widely held on Bay Street. You’d likely need to see a significant deterioration in economic conditions over the next four weeks for a half-point cut. Many analysts think the bank will cut at each of its three remaining decisions this year, so you’d end up with a 4 per cent benchmark lending rate by October.
This Q&A has been edited for length and clarity.
Paris 2024
‘I felt light out there. I felt like a feather.’
An excellent pole vault.Cameron Spencer/Getty Images
First, the good news: Pole vaulter Alysha Newman set a national record and nabbed a bronze in her third Olympics yesterday. Melissa Humana-Paredes and Brandie Wilkerson are a win away from a medal in women’s beach volleyball; they play Switzerland beneath the Eiffel Tower today. Now, the not-so-good news: Andre De Grasse failed to qualify for the 200-metre final, though he’ll run in the 4x100-metre relay final tomorrow. (The women qualified too.) Defending champ and Canadian flag-bearer Maude Charron looks to repeat her gold today in the women’s under-59-kilogram weightlifting final, while shot putter Sarah Mitton will head to the final after finishing first in her qualifier this morning. Also, if you’re curious about what exactly is up with that club-thumping business at the start of events, The Globe’s Paul Waldie lays it out. For all our Olympics coverage, go to tgam.ca/olympics-daily.
The Wrap
What else we’re following
At home: For months, the federal government urged Canadians in Lebanon to get out of the country, as tensions with Israel rose. Now the Armed Forces are moving ahead with plans for a possible evacuation of stranded Canadians.
Abroad: Fears of fresh riots put Britain on high alert, as far-right protesters and anti-racism counterprotests showed up in cities across England.
Heating up: Ocean temperatures in the Great Barrier Reef hit their highest levels in 400 years, posing an existential threat to the world’s largest coral reef ecosystem.
Shutting off: More indoor and outdoor water restrictions are coming to Calgary later this month, after city officials found additional problem spots in a major water main.
Coming back: When Celine Dion sang Edith Piaf’s Hymne à l’amour from the middle of the Eiffel Tower, it wasn’t just a patriotic choice – it was a defiant one.