"Interest Rates Hold Steady as Does My Optimism"
I think we would all agree that the Bank of Canada's announcement to maintain its policy rate at 4.50% is indeed a positive development. This decision benefits borrowers and offers a confidence boost to buyer and sellers, just in time for the lively spring market.
The Bank's latest Monetary Report unveiled some insightful updates. Inflation has been a central concern and it's beginning to cool down. The Consumer Price Index (CPI) inflation eased to 5.2% in February, with core inflation slightly below 5%.
According to the Bank's projections, we can expect inflation to decline quickly to around 3% by mid-2023, followed by a more gradual descent to the 2% target by the end of 2024.
Globally, we're observing a similar trend as lower energy prices, stabilizing supply chains, and tighter monetary policy reduce inflation. Nonetheless, there are challenges, as labor markets remain tight, resulting in persistent price pressures, particularly for services.
Moving on to the Canadian economy, domestic demand currently surpasses supply, and the labor market remains tight. However, the first quarter of 2023 brought stronger-than-anticipated economic growth due to a surge in exports and robust consumption growth.
Population growth plays a significant role, contributing to the labor supply, employment growth, and overall consumption. But with foreign demand softening, we can expect exports and business investments to experience some restraint. The Bank projects that Canada's economy will grow by 1.4% this year, 1.3% in 2024, and then accelerate to 2.5% in 2025.
So, how does this affect the Toronto housing market? At present, the market activity is relatively subdued. As more households renew their mortgages at higher rates and restrictive monetary policies impact the economy, consumption is expected to moderate this year.
Globally, the economy isn't lagging, with the Bank estimating a 2.6% growth in 2023. However, this growth will decrease to 2.1% in 2024 before rising to 2.8% in 2025. Recent advancements in the United States and Europe have been promising, although tighter monetary policies may affect growth in these regions.
Meanwhile, in China, the economy is rebounding, especially in the service sector. Commodity prices remain near their January levels.
The Bank's primary objective is to restore price stability for Canadians. Achieving the last stretch to a 2% inflation rate could be challenging, as service price inflation and wage growth stubbornly persist, and corporate pricing behavior is yet to normalize.
In the coming months, the Bank will closely monitor these factors and the progression of core inflation to guide the Canadian economy toward that sought-after 2% target. And if necessary, they stand prepared to raise the policy interest rate to achieve this goal.
