Economists anticipate rate cuts after inflation drops below 2%
On the cusp of the next Bank of Canada rate cut decision next week, the latest CPI (consumer price index) report has economists discussing its potential effects on the housing market.
Canadian consumer prices dropped by 0.4%, bringing the annual inflation rate down to 1.6% from 2.0% in August. This marks the first time inflation has fallen below the BoC’s 2% target since February 2021.
The easing inflation comes after nearly four years of persistent price increases, during which consumer prices rose by a cumulative 16%. The BoC's preferred inflation measures, including the core inflation metrics, showed stability in September, with no significant increases. The three-month average growth rate for these measures also dipped slightly to 2.1%.
Energy prices played a big role in driving down inflation. BMO chief economist Douglas Porter believes this decline in inflation is a significant turning point.
“The drop in headline CPI to below 2% is a watershed moment,” he said, noting that it will help calm inflation expectations moving forward. While energy prices may fluctuate in the short term, easing shelter costs are expected to continue pulling inflation lower.
Looking ahead, Porter expects the BoC to respond to these shifts by cutting rates. He suggested that the combination of falling inflation, high unemployment, and weak consumer and business sentiment could lead to a 50-basis point rate cut.
“It's a close call, but we suspect that the big improvement in inflation, the still-high unemployment rate, and the still-sour consumer and business sentiment will be enough to prompt the Bank of Canada to opt for a 50 bp rate cut later this month,” Porter said in a commentary. “After all, the BoC has dovishly signalled that they are now more concerned about downside risks to the economy and the possibility that inflation may drop too low.”
RBC economist Claire Fan echoed this view, emphasizing that the BoC’s focus is shifting away from inflation and toward economic stability. While shelter costs are still climbing faster than most other categories, Fan said the overall price pressure has returned to pre-pandemic levels.
“We think there’s little reason for the BoC to turn their worries back from a weakening economy to inflation, and expect them to go ahead with cutting by 50 bps next week,” she said.
But what does this mean for the housing market? Recent signs suggest the market may be stabilizing.
According to Robert Hogue, assistant chief economist at RBC, “Lower interest rates got the wheels turning a little faster in September for homebuyers,” with home sales increasing for the second straight month, rising by 1.9% from August.
This uptick in activity comes as sellers are listing more properties – more than at any point in the past two years. Hogue noted that the number of homes on the market has returned to pre-pandemic levels, which has helped balance buyer and seller dynamics.
“The bargaining power of sellers and buyers has generally been rebalanced, stabilizing property values,” he said.
The national composite MLS Home Price Index has remained flat since the spring, and Hogue predicts that home prices could see firmer growth once the BoC starts cutting rates next year.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
