Current market is 'like finding a needle in a haystack', says executive
Mortgage market watchers are hoping Bank of Canada interest rate cuts will fuel busier times in the months ahead – but it could take some time for tightness in the overall debt market to ease.
Lenders are continuing to take a cautious and safety-first approach to the market, meaning that securing money in Canada so far this year is “like finding a needle in a haystack,” according to BDO Canada partner and leader – capital advisory, Shilpa Mishra (pictured top).
The Bank of Canada opted to trim its benchmark rate by 25 basis points in its September announcement, marking the third decision in a row it’s lowered interest rates.
Still, some observers believe the central bank should be more aggressive in its approach – especially with the Canadian economy showing increasing signs of losing steam.
Mishra highlighted a “pressure cooker” environment that’s prevailing for businesses forced to grapple with high interest rates in recent times. “Canadian businesses are struggling with higher debt payments driven by some of the most restrictive interest rates we’ve seen in two to three decades,” she said.
“In addition to these debt payments, they’re working through inflationary trends and this is resulting in an uptick in delinquencies.”
Is the Canadian economy in trouble?
The good news is that if rates continue to fall at their current pace there’s likely to be a recovery by around the middle of next year, with delinquencies set to level off – and a “steep reduction” in overnight rates could push that timeline forward.
Canada's housing market remains in a "holding pattern" despite a 1.3% rise in home sales in August, says the Canadian Real Estate Association (CREA).
— Canadian Mortgage Professional Magazine (@CMPmagazine) September 16, 2024
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South of the border, the Federal Reserve is scheduled to announce its next decision on interest rates on Wednesday (September 18), a statement that will be keenly followed by Canadian observers hoping to glean some insights on how the Bank of Canada might react.
That’s because Canada’s central bank typically can’t afford to diverge too far from the Fed in its own approach to rates – meaning for now, the Bank of Canada is in something of a “holding pattern” with respect to rates as it waits for the Fed to play its hand, according to Mishra.
“The economy in the US has defied logic,” she said. “It scaled new heights in the second quarter of 2024. This was driven by a strong labour market… if the Bank of Canada were to cut rates faster than expected, or faster than the Fed in a bid to boost the Canadian economy, it will drive down the value of the Canadian dollar and this would make imports more expensive, resulting in an inflation shock which needs to be avoided.”
That means the US economy is currently putting the Bank of Canada “between a rock and a hard place” according to Mishra, although “clear signs” of a slowdown in the US have raised the prospect of a so-called supersized cut by the Fed of 50 basis points or more.
Slowing US economy could give Bank of Canada leeway
Canada’s unemployment rate has been on a steady rise in recent months, hitting 6.6% over the summer as jobs growth has remained tepid, although the US labour market is also beginning to grind.
Nonfarm payrolls increased by 142,000 across the US in August – but the three-month average sank to its lowest level since 2020 and unemployment has increased in four of the last five months.
In both the US and Canada, the prospect of borrowing costs dropping in the year ahead is set to ease pressure on homeowners and business owners who’ve seen their budgets stretched by rate hikes since 2022.
The likelihood of an economic recovery thanks to falling rates also means Canada remains on course to achieve the so-called soft landing hoped for by economists, BDO’s report indicated, meaning inflation should rest around the Bank of Canada’s target level without a significant economic contraction.
But those inflationary trends, and high interest rates by the standards of recent years, “will continue to weigh on economic activity,” it added, “resulting in future muted growth in Canadian business and corporate sector debt activity.”
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