Central bank has lowered rates for the first time since 2020
A long-awaited interest rate cut by the Bank of Canada this week marks a “new phase” in the central bank’s rate policy following a prolonged period marked by hikes and high borrowing costs, according to a leading mortgage executive.
The Bank lowered its benchmark rate by 25 basis points on Wednesday, the first time it’s cut rates since the onset of the COVID-19 pandemic in March 2020.
For James Laird (pictured top), president of the CanWise mortgage lender, that decision was “big news” for Canadian borrowers and the first sign that the central bank is finally shifting away from the approach that’s dominated for more than two years.
“We had the first phase – cut rates super aggressively – at the start of the pandemic, and then they had to raise them super aggressively to fight inflation [in 2022],” he told Canadian Mortgage Professional. “And now we’ve entered the ‘OK, rates are going to be coming down’ [phase].”
Laird stepped down from his role as co-chief executive officer of RateHub.ca this week, moving into a new role with the mortgage lender as Naga Parvatharajan moved into the position of sole CEO.
The central bank introduced a flurry of rate hikes throughout 2022 and 2023 to tackle surging inflation, and had left its overnight rate unchanged for six consecutive decisions – keeping it at a 23-year high of 5.0% – prior to Wednesday’s announcement.
#BreakingNews: The Bank of Canada has cut its benchmark interest rate by 25 basis points, a decision that marks the first time its key rate has fallen since the beginning of the COVID-19 pandemic.https://t.co/jhtIwsfCKc
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 5, 2024
Good news for homeowners and variable-rate mortgage holders
While a 25-basis-point cut may not herald a huge change in the borrowing landscape, it still marks a positive step for homeowners who’ve seen their budgets pummelled amid that spate of rate jumps.
“I think it’s a pretty exciting day, especially if you’re one of the Canadians who has hung onto a variable rate,” Laird said. “Lots of people converted to fixed rates, but many hung onto their variable. So this is really the day you’ve been waiting for. And you’re probably optimistic that a few more cuts might be coming soon.”
The likely impact on Canada’s housing market remains unclear. Homebuying activity has been somewhat muted across the country in the opening half of the year, with plenty of would-be purchasers reportedly remaining on the sidelines amid resolutely high rates and continuing affordability challenges.
The jury is still out on whether Wednesday’s cut will light a fire under the market or if buyers are likely to wait for further rate reductions before deciding to re-enter the market, according to Laird.
“It’ll change things. To what degree, I’m not yet certain,” he said. “I think there’s a chance that it changes things dramatically – meaning even though it’s a quarter point, it’s still just a psychological shift to, ‘We’re in a falling rate environment. That means that home prices are probably going to pick up – I need to buy now.’ That kind of fear of missing out, will that return? I think it’s a possibility.
“The other possibility is people say, ‘OK, we got our first rate cut here, but we’re still up close to 5%. So really, that first quarter point is just a drop in the bucket. I’m going to wait to see what else comes.’”
Is the Bank’s latest decision a gamechanger?
The reality remains that Wednesday’s cut has changed little from an affordability perspective – and the majority of hopeful buyers who didn’t qualify for a mortgage before the reduction probably still won’t qualify now.
Still, the symbolism of the announcement can’t be ignored, Laird said, especially with the Bank giving no indication that further rate cuts later in the year are off the table.
Its language suggested it could be prepared to bring rates lower again in July, Bank of Montreal chief economist Doug Porter told CMP, with potentially another 75 basis points worth of cuts in the offing before the end of 2024.
On the whole, Wednesday’s announcement marked a significant positive step for the mortgage market, according to Laird.
“This cut will help [homeowners] a bit, and now it’s a pretty exciting place to be if you think that your interest rate and mortgage payment are going to steadily drop over the next few years,” he said. “That would be a pretty nice place to be in – especially after the opposite for many years.”
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