Canadian Inflation Fell in June, Setting the Stage For BoC Rate Cut

Inflation unexpectedly slipped 0.1% (not seasonally adjusted) in June, following a 0.6% increase in May. This was the first decline in six months. The monthly decrease was driven by lower prices for travel tours (-11.1%) and gasoline (-3.1%). 

The Consumer Price Index (CPI) rose 2.7% year over year in June, down from a 2.9% gain in May. The deceleration was mainly due to slower year-over-year growth in gasoline prices, which rose 0.4% in June following a 5.6% increase in May. Excluding gasoline, the CPI rose 2.8% in June.

Lower prices for durable goods (-1.8%) y/y also contributed to the slowdown in the all-items CPI in June, following a 0.8% decline in May. An increase in prices for food purchased from stores (+2.1%) moderated the deceleration, as well as a smaller decline for cellular services in June (-12.8%) compared with May (-19.4%).

The Bank of Canada's preferred measures of core inflation, the trim and median core rates, exclude the more volatile price movements to assess the level of underlying inflation. The CPI trim was unchanged in June at 2.9%, above the market's expectation of 2.8%. The CPI median fell two ticks to 2.6%. 

The third chart below shows the 3- and 6-month moving averages for the average of median and trim CPI measured as an annualized percentage change. While the 3-month moving average has accelerated to about 3%, the 6--month measure has fallen to just over 2%.

Bottom Line

Today's inflation reading is good news for the Bank of Canada, giving them leeway to cut interest rates next week. June marks the sixth consecutive month that the headline yearly inflation rate has been within the BoC's target range, bringing the annual pace of price pressures back to its weakest levels since 2021. 

Today's inflation data will give the central bank confidence that the May rise in inflation was temporary. Annual inflation will reach the Bank's 2% target by some time next year. This opens the way for the Bank to cut the overnight rate on July 24 by 25 bps to 4.5%. 

According to Bloomberg News, traders in overnight swaps increased their bets that the Bank of Canada would cut rates next Wednesday, putting the odds at about 90% compared with 80% before the release.

Yesterday's business and consumer outlook surveys point towards slowing growth in firms' input and selling prices amid a weaker economic backdrop. Inflation expectations fell in June and are now in the BoC's target range. Businesses are expecting weaker soft demand. The unemployment rate is trending higher, and the share of firms reporting labour shortages is near a record low. Companies' expectations for wage increases over the next year have slowed. Overall, capacity constraints “have returned close to their historical average.”

The central bank flagged that consumer survey respondents still think domestic factors, including fiscal policy and elevated housing costs, are “contributing to high inflation.” Home-buying intentions are near historical averages, the bank said, and are supported by “strong plans” among newcomers to buy homes.  

Another rate cut is coming next week, which will help to spur housing activity

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

May 2024 saw 8,075 home sales in BC, a decrease of 11.6 per cent from May 2023. The average price is down to $1 million. Check out our May 2024 Stats Release here: https://bit.ly/3RsSpul

The Bank of Canada finally gave many of us some good news, dropping the overnight rate by .25% to 4.75%.  This will trigger the banks to drop their prime rate by .25% down to 6.95% from 7.20%, reducing interest and in some cases payments for all borrowers with variable rate mortgages.  This is the firs time the Bank of Canada has reduced rates in four years.

When does this take effect?

If you are in a fixed payment variable rate mortgage, than your payments will not change.  Instead, more of your payment will go towards principal and less towards interest.  Most of the major banks have a fixed payment variable rate product.  Scotia is one of the only banks that offers an adjustable payment variable rate mortgage and other lenders do as well including mortgage finance companies and some credit unions.

When does this take effect? 

If you are in a fixed payment variable mortgage, then your payments will not change. Instead, more of your payment will go towards principal and less towards interest. Most major banks have a fixed payment variable product.

If you are in a fixed payment variable mortgage, then your payments will not change. Instead, more of your payment will go towards principal and less towards interest. Most major banks have a fixed payment variable product.

How much of an impact is this?

Per $100,000, the interest cost will decrease by about $14 per month per $100,000, depending on the rate and amortization. For lines of credit, the decrease in payments will be about $21 per $100,000. 

How does this affect fixed rates?

Fixed rates and variable rates move independently, as fixed rates are highly correlated with the bond market. Typically the bond market prices in future decreases and has had a 50% decrease priced in for a few months now. On Friday, this ticked up due to some encouraging inflation numbers in both Canada and the US. With the move by the BoC today, along with some further weakening data coming from the US, the bond market dropped again resulting in .4% in decreases since Friday. Although we wouldn’t have expected much of a change in rates, the expectations for the next cut are moving forward and so the bond market is starting to assume rates will come down a bit more than expected.

When will the Bank of Canada drop next?

Well, this is the million dollar question, but currently the market is pricing in a 40% chance of a cut in July, a 100% cut by Sept and one more cut by Dec. This would mean in total .75% in cuts in 2024. The pendulum swings on this data quite frequently, so stay tuned on future changes to these predictions.

What is better - variable or fixed?

Technically variable has been either pricing out as the same or better since September of last year. With the first cut now “in the bank”, we will be updating our variable vs fixed comparison tool but we expect variable to outperform a fixed over the next 3 years. As of right now, a variable is expected to cost about $7,000 less over 3 years on a variable than on a fixed, but there are a number of reasons to still consider a fixed rate.

Summary

We are too early to tell if this is finally the beginning of a slow slide downwards, but it is at least a start. We will watch the market intently to see what occurs next as additional economic data becomes available.

Reviewed on Jun 07, 2024 by Jordan and Michelle

Rated 5 stars out of 5

5.00

5 out of 5

Wendy was a fantastic agent for us. She must be the hardest working agent in the business. We spent more than a year looking at various properties in and around Vancouver. Wendy was always happy to arrange showings and attend with us - for months! She is incredibly responsive to any form of communication. She's very knowledgeable about all things on both sides of the market. She helped us sell our condo and got us into a new home. It was a pleasure working with Wendy. 

You've helped to buy my property

Did you get the home value you desired from this transaction?

Yes

Would you use this professional again?

Yes

Are you aware of any factors that were beyond the control of your Agent?

No

Neighbourhood Knowledge

Did your real estate agent help you learn about your neighbourhood you sold, rented or purchased in?

5/5

Experience

How well did your professional guide you through the real estate process?

5/5

Professionalism

Did your real estate agent present themselves and the properties in a professional manner?

5/5

Negotiation Skills

Did your real estate agent offer advice on negotiation? Were they able to negotiate successfully on your behalf?

5/5

Property Knowledge

Did your professional have specific knowledge on the property that you were looking to buy, sell, or rent?

5/5

Communications Skills

Did your real estate professional keep you up to date on your transaction?

5/5

The current rules require that one-half of capital gains be included in income for taxation purposes. As of June 25, while that inclusion rate remains in place for gains of up to $250,000 realized on the sale of assets during a year in total, two-thirds of gains beyond that level will become taxable.

The Government of Canada has announced a two-year extension to an existing ban on foreign ownership of Canadian housing. The Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act) was set to expire at the end of 2024, it will now be extended to January 1, 2027.

BC home flipping tax 

The proposed BC home flipping tax applies to income from the sale of a property, including presale contracts, in British Columbia if the property was owned for less than 730 days.

The tax is imposed under the Residential Property (Short-Term Holding) Profit Tax Act, which takes effect starting January 1, 2025, subject to approval by the legislature.

Property purchased before the tax’s effective date may be subject to the tax if sold on or after January 1, 2025 and owned for less than 730 days unless an exemption applies.

The BC home flipping tax is separate and distinct from the federal property flipping rules and is not harmonized or administered with the federal or B.C. income tax. It is intended to discourage short-term holding of property for profit as part of the Homes for People Plan (PDF, 5.93MB).