Are brighter times ahead for the mortgage market?
The Bank of Canada lowered interest rates yesterday for the second time in 2024 – and another cut is probably on the way in September, according to Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal (pictured).
The central bank’s second 25-basis-point drop in two months saw its benchmark rate fall to 4.50%, and Tal told Canadian Mortgage Professional its tone suggested it was likely to bring rates lower again at its next announcement.
Economic indicators, he said, appear to be trending in the right direction for Bank decisionmakers. “You listen to the language of the Bank of Canada: very dovish numbers, very dovish language, indicating that September is also on the cards,” he said.
“We don’t have much data between now and September to change their mind, quite frankly. So I think that September will be another move for sure – unless something big happens.”
The Bank’s language, in its statement accompanying Wednesday’s decision, suggests that it views the economy as operating in excess supply, indicating a “need” to cut interest rates further, Tal said.
Concern over the inflation outlook has long been the single biggest factor influencing the Bank of Canada’s approach to interest rates. Still, its confidence on that front appears to have risen, with broad inflationary pressures easing and core inflation lingering below the 3% mark for a prolonged spell.
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The numbers, Tal said, are speaking for themselves where inflation is concerned. “All indications are suggesting that the only reason why inflation is elevated is interest payments on mortgages,” he said. “And they realize that that’s not really a good enough reason [to keep rates high].
“They’re talking about a situation in which many components of the CPI [consumer price index] are falling or slowing down, so they’re very optimistic about inflation. They’re a little bit more optimistic about economic growth for Q3 and if we miss that growth, that will give them another reason to cut.”
How far will rates fall during the rest of 2024?
At least another 50 basis points’ worth of cuts between now and the end of the year are likely, Tal said, with an economic slowdown in the US also suggesting that the Federal Reserve is likely to start cutting there in September. That move that would ease pressure on Canada’s central bank, whose rate path rarely diverges significantly from the Fed.
Markets are currently pricing in an overwhelming probability that the Fed will lower its key rate in September, although Tal cautioned that the Bank of Canada’s path forward could be complicated if that doesn’t occur. “The only question is if the Fed does not cut in September and the Bank of Canada [does],” he said.
“That will limit the ability of the Bank of Canada to continue cutting because then the spread between the Fed and the Bank of Canada will be too wide, and that will put pressure on the Canadian dollar. That’s something that the Bank of Canada would like to avoid. [If] the Fed starts moving, which is more likely now, you remove this uncertainty from the equation.”
What does the latest BoC cut mean for Canada’s housing market?
As for the question of whether two consecutive Bank of Canada rate cuts could help spur an uptick in homebuying activity, Tal pointed to a “tale of two markets” that’s currently at play: while the low-rise space continues to perform well because of a continuing lack of inventory, the condo segment appears to be in a recession with little prospect of an imminent recovery.
For mortgage holders who are set to refinance, meanwhile – and those who are on variable rates or hold a home equity line of credit (HELOC) – the Bank’s latest decision will come as welcome news in easing borrowing costs that spiked between early 2022 and the first half of this year. “Every basis point helps,” Tal said, “and clearly, that’s something that will continue to be the case.”
All in all, the Bank’s July decision and accompanying statement marked a further sign that the days of interest rate hikes seem to be rapidly fading in the rearview mirror. “They were actually even more dovish than expected,” Tal said, “which is good news for interest rates.”
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