Central bank lowered rates by a further 25 basis points on Wednesday
The Bank of Canada (BoC) has once again lowered its key interest rate by 25 basis points to 4.5%, marking the second rate cut this year. While the move aligned with market expectations, housing industry experts are divided on its immediate impact on housing affordability.
Governor Tiff Macklem, in a more dovish statement than the rate announcement itself, signalled further rate cuts if inflation continues to decrease as forecasted. He noted that the risk to inflation now leans more towards the downside, focusing on the Canadian economy's excess supply as a sign that inflation pressures may continue to ease.
More rate cuts?
The BoC cited increased excess supply in the Canadian economy as a key factor in its decision, expecting this to contribute to unwinding inflation pressures. Economic growth is projected to have decelerated further in the second quarter of 2024, following a slowdown in Q1.
“Moving forward and similar to our own forecast, the BoC expects unwinding in price pressures will persist and economic conditions in Canada will gradually improve,” the Royal Bank of Canada (RBC) wrote in a note. “The BoC’s forecast is for their preferred core inflation measures to slow to 2.5% over the second half of 2024 from 2.7% in Q2, and slow further to reach the 2% target in 2025.”
While highlighting areas of persistent inflation, including shelter costs and service sectors with high labour components, the BoC noted early signs of easing in these areas.
Rent price growth in major markets has reportedly stalled, and mortgage interest cost increases are expected to naturally slow as interest rates decline.
“The BoC highlighted parts of the economy that are still seeing abnormally high pressure in price growth, but also thinks a weaker economic and labour market backdrop, as well as increased excess supply should continue to propel inflation back towards the target level this year and next,” said RBC economist Claire Fan. “Against that backdrop, our expectation remains that there will be two additional rate cuts this year, one at each meeting after today’s meeting that will lower the overnight rate to a still restrictive 4% by the end of 2024.”
Impact on real estate
Mark Fieder, president of Avison Young Canada, said the rate cut could boost investor confidence in commercial real estate.
"Today's announcement from the Bank of Canada will have a positive impact on investor sentiment,” said Fieder. “Commercial real estate return metrics are improving compared to other asset classes, and we expect this will further fuel investor appetite and capital allocation into CRE.
“We have been in a very uncertain interest rate environment over the last two years. This second rate drop certainly shows the BoC's confidence in the inflation data and reinforces the fact that we are finally shifting into a different interest rate regime."
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