Don't expect the market to roar back immediately, says BMO's Porter
The Bank of Canada’s second interest rate cut in a row isn’t likely to set the national housing market alight – but it should have a “modest positive impact” in improving buyer sentiment, according to Bank of Montreal (BMO) chief economist Doug Porter (pictured top).
The central bank trimmed its benchmark rate by 25 basis points last week (July 24), following a June cut by the same amount and strongly signalling that further moves to lower rates are on the way.
For Porter, the decision could make would-be buyers more comfortable in stepping off the sidelines, but it’s unlikely to move the needle in a significant way. “The variable rate is still well above longer-term rates, and the longer-term rates aren’t really moving that quickly,” he told Canadian Mortgage Professional. “So we probably haven’t seen just enough relief yet.
“We need a fairly steady diet of rate cuts to really juice the market. But having said all that, I think it does help to put a firm floor under the market, and I suspect that we’ll see prices stabilize in the second half of the year and even improve a bit in 2025.”
How many more cuts are on the way?
For now, the housing market’s continuing tepidness could be a good sign. Porter said the fact that a dramatic rebound hadn’t occurred was a “relief,” and that a sudden resurgence would be good for almost nobody. “We almost need a period of calmer markets to help improve affordability a little bit,” he said.
Observers looking out for an indication of further Bank of Canada rate cuts down the road will have been pleased by the central bank’s language last week, perhaps its most markedly dovish statement since it began hiking rates in March of 2022.
Victor Tran of RATESDOTCA suggests that the most recent interest rate cut may not boost home sales immediately but could improve the outlook for variable rates.
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 26, 2024
Read more: https://t.co/9hWDE7MHNX
The Bank left the door wide open for more cuts before the end of the year, and Porter said its tone suggested two more rate drops in the next two announcements remains a distinct possibility.
After maintaining a hawkish approach on rates throughout much of the last two years, the Bank appears in a mood to cut – spurred mainly by optimism on the inflation outlook. “There were a lot of indications that they think things have really normalized,” Porter said. “They said that corporate pricing behaviour is back to normal, that the dispersion of price increases is more or less normal, that the number of vacant jobs is back to pre-pandemic levels and is largely normal.
“The question is, if things are close to normal on so many fronts, why are rates so far above normal? The answer is that they shouldn’t be, at least in the Bank’s view. And so I do think they’re clearly prepared to keep cutting.”
Why is the Bank of Canada concerned about unemployment?
An unusual aspect of last week’s announcement was the Bank’s direct reference to Canada’s unemployment rate, an unusual step and an indication that it’s keeping a close eye on rising jobless figures across the country.
Signs of slack are emerging in the labour market, it said, with the unemployment rate jumping to 6.4% and the labour market outstripping overall employment.
The Bank may have underestimated how quickly unemployment would tick upwards, according to Porter. “It’s now [risen] more than a percentage point in the past year. That’s a bit disconcerting,” he said. “It’s not normal to see the unemployment rate rise that much in a year. Usually, it only happens during recessions, and I do think that’s got them a bit concerned.”
The beginning of the Bank of Canada’s rate-cutting path in June prompted some speculation as to how far policymakers believe they can afford to let the overnight rate stray from the Federal Reserve’s key rate in the US, with the two central banks typically moving largely in lockstep.
To date, the Fed has resisted calls to bring rates lower, but although odds of a September cut south of the border are surging, Porter noted that Bank of Canada governor Tiff Macklem struck a relaxed tone on the prospect of divergence between the two.
That approach, Porter said, “means he’s certainly willing to tolerate a bit of weakness in the Canadian dollar if needs be, to bring rates down. He’s definitely got a bias to keep cutting rates.”
But a potential complication for the Bank could be the inflation outlook – and wage growth in particular. “Wages are still pretty sticky,” Porter said. “And that could mean it’s going to be a little bit more challenging to get inflation down than maybe they believe.”
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