Central bank's latest move was its biggest rate reduction for more than four years
Having already lowered its benchmark rate three times so far in 2024, the Bank of Canada opted to oversize its latest cut yesterday – slashing rates by 50 basis points, the biggest single reduction for more than four years.
The central bank said in its accompanying statement that it anticipates more cuts in the months ahead if economic trends continue to play out as expected, but gave no indication of whether Canadians should expect larger-than-usual cuts to become the norm.
Still, Bank governor Tiff Macklem said at yesterday’s press conference that Canadians could “breathe a sigh of relief” thanks to the big cut – and standard quarter-point reductions moving forward are more likely than further 50-basis-point reductions, according to Bank of Montreal (BMO) chief economist Doug Porter.
He told Canadian Mortgage Professional that the Bank’s language yesterday suggested its preference was for a more cautious cutting approach than moving in big increments. “I found the Bank’s economic forecasts and the tone of the remarks to indicate that there doesn’t seem to be a whole lot of urgency to continue with such outsized cuts,” Porter said.
“I’m not saying it’s impossible. They might feel the need to cut by as much in upcoming meetings, but I didn’t get the sense that they have a lot of urgency to move quickly from here on the rate front. More rate cuts are coming – that seems pretty clear – but it doesn’t sound like this is going to be the norm, 50-basis-point moves. I would say we should assume 25 basis points, unless the economy really surprises in a big way.”
What’s next for the housing market after the BoC’s latest move?
Steady progress on inflation has seen the headline consumer price index (CPI) plunge to 1.6% in September, although the central bank did not discount potential upside risk looking ahead in yesterday’s remarks.
Macklem noted the prospect of a pickup in housing market activity – one that could “be bigger than we are expecting” – while the Bank also highlighted elevated wage growth as a factor it’s closely monitoring.
Still, the housing market is unlikely to heat up substantially in the short term even after the latest rate cut and the introduction of new rules designed to improve mortgage affordability, set to come into effect in December.
#BreakingNews: The Bank of Canada has reduced its overnight interest rate by 50 basis points, lowering it to 3.75%. Governor Tiff Macklem explained that the cut was necessary due to slowing inflation, which dropped to 1.6% in September.https://t.co/I1UNHT21vC
— Canadian Mortgage Professional Magazine (@CMPmagazine) October 23, 2024
Those moves – expanding access to 30-year mortgage amortizations and increasing the insured mortgage cap to $1.5 million – will support the housing market and contribute to a comeback, according to Porter. But the market is unlikely to “come roaring back” by any means, he said.
“I just think affordability is still so weak and the underlying economy is still so soft that it’s unlikely that housing is going to see a return to very strong conditions,” he said. “But I do think the combination of the significant decline in interest rates and some of the easing in the mortgage rules will strengthen the market over the next year.”
Where will the Bank of Canada rate land in 2025?
The Bank’s latest move means it has now cut its benchmark rate by a total of 1.25% in the year to date, bringing it to 3.75%. BMO’s expectation is for that rate to fall further in the months ahead, landing around the 2.5% mark by June, with a lingering possibility that the Bank might introduce sharper cuts if the economy lags more than expected.
Nonetheless, there’s little in the Bank’s current tone to suggest that it’s alarmed at how economic trends are playing out. “What really struck me is even with the surprises we’ve seen, inflation and some disappointing growth numbers, the Bank’s forecast for this year and next really hasn’t changed,” Porter said.
“Inflation is slightly lower, but for all intents and purposes growth is the exact same as what they expected three months ago. So I just don’t see a significant change in the Bank’s view of the overall landscape, and I wouldn’t be expecting a whole series of very aggressive cuts here.”
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