After a few months of rate hikes on hold, the Bank of Canada decided to increase the policy interest rate to 4.75%. The Bank’s decision for the rate hike in June is based on the “accumulation of evidence” which includes unexpected growth in the first quarter of 2023, a slight rise in inflation, and increased activity in the housing market. The BoC stated, "Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target.”
The Canadian Real Estate Association reported that home sales in May went up 5.1% month over month, building on to the 11.1% jump in April. The number of sales went up 1.4% from a year ago - the first y/y sales gain in nearly two years. In May, the number of newly listed homes was up 6.8% month-over-month despite new supply remaining at historically low levels. The sales-to-new listings ratio was 67.9% - a slight change from 69% in April. This measure sits at about 55.1% for the long-term average. The Aggregate Composite MLS® Home Price Index (HPI) went up 2.1% in May on a monthly basis. Similarly to last April, this was broad-based and a significant increase for a single month. Currently sitting at 8.6% below year-ago levels, the Aggregate Composite MLS® Home Price Index HPI showed a smaller decline in May than from January to April. The housing market has recently slowed down due to higher interest rates compared to earlier this spring when rates were on hold. The BoC is aware that higher monthly payments will persist in the next two years and wants household spending to decelerate from the rapid pace of quarter one this year. The BoC has expressed that, “Overall, excess demand in the economy looks to be more persistent than anticipated”. Chief economist, Dr. Sherry Cooper expects another 25 bps rate hike if the data remains strong prior to the bank’s next meeting on July 12th.
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