Analysis of the US Federal Reserve and Canadian inflation numbers
With the eagerly awaited US Federal Reserve and Canadian inflation numbers released last week we have those updates to share with you. Let’s start with Canadian inflation statistics. As mortgage professionals, we keenly monitor inflation as it’s the Bank of Canada’s (BOC’s) leading indicator for how the BOC adjusts its overnight rate.
If our economy is growing too quickly the BOC may increase their overnight rate to cool our economy and slow inflation. Conversely, a slowing economy may signal the bank to lower its overnight rate and stimulate our economy. February’s inflation numbers came in higher than expected. Gross inflation was 2.2% and core inflation, which strips away volatile components like energy and food, was also above 2%.
This news boosted our Canadian dollar and triggered some discussion on what the Bank of Canada will do when it next meets April 8th. Our perspective is the Bank of Canada will leave its overnight rate unchanged for the following reasons:
Retail sales are slowing
January’s retail sales showed a disappointing 0.3% growth when expectations were for 1.1%.
The Canadian housing market is slowing
Year-to-date housing sales are down an average of 16.6% according to the Canadian Real Estate Association’s February statistics.
Trade volatility and NAFTA
The future of NAFTA and lingering trade issues with the US are yet to be decided.
Debt levels remain elevated
Both consumer and business debt levels remain near record highs. With the BOC having raised its overnight three times in the last year, the BOC can afford to wait for more certainty in the markets before raising its overnight rate again. We expect any further increase will occur this summer or fall depending on the data.
With the US economy going strong, the US Federal Reserve increased its overnight rate by 0.25% last week to 1.75%. Most analysts believe the US will increase its overnight rate 3 more times this year. One of the consequences of a strong US economy is an increase in bond rates which affect longer-term interest rates. US Govt Bonds serve as a benchmark for bond prices around the world. With the US economy forging ahead we have seen an increase in the cost of Bank of Canada bonds affecting 3 year and longer interest rates. Short-term and Variable Rate Mortgages are based on Bank Prime while 3 year and longer fixed-rate mortgages are based on bond yields dictated by the broader capital markets rather than the BOC. With the US economy showing no signs of slowing we expect our fixed-rate mortgages to slowly increase over time.
Update on BC Government’s Speculation Tax
Yesterday the BC Government released additional details on its new speculation tax.
Geographic areas where the tax will apply: Metro Vancouver, Capital District (Excluding the Gulf Islands), Kelowna & West Kelowna, Nanaimo-Lantzville, Abbotsford, Mission, and Chilliwack
Rate Design – In 2018 the tax will be assessed at 0.5% of the Property Value
In 2019 and subsequent years the rates will be as follows:
2% for foreign investors & satellite families,
1% for Canadian Citizens and Permanent Residents who do not live in BC,
0.5% for BC Residents who are Canadian Citizens or Permanent Residents
Exemptions and Tax Credit Design – BC Residents with vacant second homes in the catchment areas will eligible for a non-refundable tax credit applied against the speculation tax. The limit of the credit is $2,000 capping the value at $400,000 for a vacant second home.
Long Term Rental definition – A home that is rented out for at least 6 months out of the calendar year in increments of at least 30 days. For 2018, a long-term rental is a property that is rented out for 3 months during the calendar year.
Special Case Exemptions – There will be exemptions for homeowners facing special circumstances such as medical care, absences for work purposes and estates being processed.