The Bank of Canada has finally decided to lower its policy rate by 0.25%! Most bank prime rates will drop to 6.95% (excluding any discounts that lenders like us might offer). Check out how this rate cut could affect your mortgage and help you save money!

We’ve had a long wait, but the first rate drop in 4 years is finally here. Will there be more rate cuts in the future? Many people ask me about interest rates and how they impact mortgages. That’s why we built True North Mortgage to offer the lowest mortgage rates and the best service. Other companies have tried to copy us, but we still lead the way!

From March 2022 to June 2024, the Bank of Canada’s (BoC) rate-hike cycle increased rates from 0.25% to 5.0%—the fastest rate rise since 2001. Now, after 826 days of this cycle, we’ve seen our first rate cut on June 5.

What Does This Mean for You? In May, higher inflation made headlines, but by June, the job market cooled off, setting the stage for this July rate cut. We hope for more cuts, but it all depends on upcoming inflation reports and the economic situation.

Inflation and Mortgage Rates

May’s inflation was higher at 2.9%, up from April’s 2.7%, causing concern. This was the biggest jump in grocery prices since January 2023. But just one month of inflation doesn’t make a trend. We need to watch the CPI (Consumer Price Index) on July 16 to see if we’re in for more changes.

Reasons for More Rate Cuts:

June’s unemployment rate in Canada was 6.4%, the highest in two years.
Job vacancies are decreasing quickly, showing a weaker labor market.
Canada’s GDP (Gross Domestic Product) growth was lower than expected in April.
Productivity rates and per capita GDP have been low for years.
S. inflation dropped to 3.3% in May, showing a cooling economy.
Mortgage and rent costs have gone up by 23.3% and 8.9% respectively from last May.
Over 2 million mortgages will renew in 2024 and 2025 at higher rates, causing financial stress for many households.

Challenges to Lower Rates:

May’s CPI report showed broad-based price increases.
Wage growth in Canada was up by 0.3% in June, which can fuel inflation.
Higher PPI (Producer Price Index) numbers from April led to higher prices for consumers in May.
A housing market surge could push home prices higher and delay rate cuts.
Government spending and debt levels are rising.
Continued U.S. economic strength could keep prices high.
A survey shows some Canadians might adjust to higher rates for a better financial outlook.
A big difference in rates between Canada and the U.S. Federal Reserve could affect our dollar and inflation.
Oil prices going over $100 might increase costs for businesses, which can be passed on to consumers.

How Does the Federal Reserve Affect Inflation and Jobs?

What Does the Federal Reserve Do?

The Federal Reserve, or Fed, uses its special tools to affect inflation and employment. They mainly do this by changing the federal funds rate—the interest rate that banks pay to borrow money for one day.

How Does the Federal Funds Rate Work?

When the federal funds rate goes down, borrowing money becomes cheaper for everyone. This means:

Households can buy more goods and services.
Businesses can invest in things like new equipment or buildings and hire more workers.
More demand for goods and services can push up wages and other costs, which can influence inflation.

When the economy is not doing well, the Fed might lower the federal funds rate to near zero to help things improve. If that’s not enough, the Fed can use other tools to keep the economy moving in the right direction.

But Inflation and Jobs are Affected by Many Things:

Even though the Fed’s actions are important, they aren’t the only things that affect inflation and employment. There are many factors that play a part.

Causes of Inflation:

Cost Push Inflation: When the cost of making goods goes up, prices go up for everyone.
Demand-Pull Inflation: When lots of people want to buy things, prices can go up.

Current Inflation Rate

Inflation Rate: This is the percentage that shows how much prices are going up over time.

Cyclical Unemployment:

Cyclical Unemployment: This type of unemployment happens when there’s not enough demand for goods and services during a slowdown in the economy.

The Fed uses the federal funds rate to try to keep the economy balanced. Lowering the rate can help boost the economy and create jobs, but many things can affect inflation and employment beyond just interest rates.