2024-07-24 10:13:17
As expected, the Bank of Canada cut its key interest rate by a quarter percentage point on Wednesday, from 4.75% to 4.5%. This was a breath of fresh air for borrowers, but experts in the real estate industry offered some nuances. Explanation.
This is the second cut in the key interest rate since June, when it peaked at 5% after being hiked sharply to curb surging inflation.
For mortgage borrowers in particular, the second consecutive drop in interest rates bodes well for the future.
“This quarter percentage point drop, combined with the decline in June, reduces borrowing costs by half a percentage point. We are now moving towards a lower interest rate environment, which will provide significant relief to borrowers,” said Philippe Simard, Quebec mortgage director at analytics consultancy Ratehub.ca.
Disadvantages of Residential Real Estate
“With borrowing costs still high, it remains to be seen whether a second rate cut will spur buyers back into the property market,” Philip Simard said.
The Association of Architecture and Housing Professionals of Quebec (APCHQ) has similar reservations.
“This improvement [des coûts d’emprunt] “This must be approached with caution. Mortgage rates remain high and this reduction alone will not be enough to revive the residential construction industry. Large financial institutions remain concerned about the growth in unemployment and the level of mortgage delinquencies,” the APCHQ Economics Department said in a press release.
Although highly anticipated, the Bank of Canada’s second rate cut came after a series of clear signs of a slowing economy: rising unemployment, falling retail sales and falling inflation.
What does the Bank of Canada say?
In its monetary policy review on Wednesday, the Bank of Canada appeared increasingly concerned about the risk that higher interest rates could slow the economy and unduly slow inflation.
Bank of Canada Governor Tiff Macklem explained at a press conference that as inflation approaches its 2% target, the risk to the central bank of maintaining high interest rates has become more significant.
“The need to restore growth was part of our decision to cut our key interest rate today,” Macklem said.
Photo credit: Blair Gable, Reuters
Bank of Canada Governor Steve Macklem
Broad economic weakness is holding down inflation. But at the same time, pressure [haussières] Rising housing costs and other service prices are not helping to reduce inflation.
Tiff Macklem, Governor of the Bank of Canada
Canada’s inflation rate fell to 2.7% in June after a temporary acceleration in May. The Bank of Canada’s new economic forecasts released on Wednesday show that inflation will return to its 2% target next year. According to the central bank, the economic situation remains weak compared with population growth and is expected to strengthen in the second half of 2024. Real GDP growth is expected to average 1.2% this year, followed by 2.1% in 2025.
Meanwhile, banking economists said higher borrowing costs have led to lower spending by consumers and businesses, helping to ease pressure on prices of goods and business services.
As a result, they believe the Bank of Canada’s new focus on economic conditions and the risks of keeping interest rates high for a long time suggest more rate cuts may come sooner rather than later.
The central bank’s next interest rate decision is scheduled for September 4.
Partnering with Canadian media
Economists’ view
The dovish tone from the Bank of Canada reflects growing concerns about a possible recession. There is every reason to believe that these monetary policymakers feel compelled to continue the rate-cutting cycle in September. At Desjardins, we are moving forward with our forecasts for the upcoming rate cuts. We expect the Bank of Canada to cut its key interest rate again in September and then again in October before pausing in December to assess the impact of its decision on the economy and inflation.
Randall Bartlett, Director of Canadian Economic Analysis, Mouvement Desjardins
BMO continues to expect two more rate cuts by the end of 2024, which would bring the Bank of Canada’s key rate down to 4%. As for the timing of the decline, it will still depend on the next economic data, especially inflation and unemployment rates. At present, if the next inflation data remains favorable, the possibility of a further decline in September remains.
Douglas Porter Chief Economist, Bank of Montreal (BMO)
In its comments, the central bank stressed that some parts of the economy still face unusually high inflationary pressures. But it also expects that the slowdown in the economy and the job market, combined with a growing oversupply of goods and services, will continue to push inflation down to target. Against this backdrop, the Royal Bank still expects to cut its key interest rate twice this year, to 4% by the end of 2024.
Claire Fan, Senior Economist, RBC
Two consecutive rate cuts and more to come. This is the message from the Bank of Canada as a slowing economy no longer requires such punitive rates to curb inflation. At CIBC, we think it will take longer for lower interest rates to lead to a re-acceleration of economic growth. In the meantime, a slowing economy and inflation could prompt two more cuts in the key rate in September and October, bringing the year-end rate down to 4%.
Avery Shenfeld, Senior Economist, CIBC
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