As summer approached, many were wondering if the Bank of
Canada would lower interest rates. The central bank has now made its move,
becoming the first major G7 institution to shift its monetary policy by cutting
rates.
At its June policy meeting, the Bank of Canada reduced the
key interest rate by a quarter of a percentage point, from 5% to 4.75%.
Although inflation hasn’t quite reached the Bank’s 2% target—consumer price
index (CPI) inflation slowed to 2.7% in June—the decision was made with
confidence that the country is on track to meet this goal.
Citing economist Milton Friedman’s theory that monetary
policy has a "long and variable lag," officials noted that the full
effects of their actions may not be immediately felt. If they wait for
inflation to hit the 2% target before acting, it could lead to delays in
achieving price stability.
By the time of the July meeting, officials once again
lowered the benchmark rate by 25 basis points, bringing it to 4.5%. This was
followed by another quarter-point cut at the September meeting.
During the July announcement, Bank of Canada Governor Tiff
Macklem indicated that the economy was cooling down enough to suggest progress
toward restoring price stability. “Economic growth in Canada has picked up but
remains weak relative to population growth. Household spending has been soft,”
Macklem said in a post-meeting press conference. “If inflation continues to
ease in line with our forecast, further cuts to the policy rate are reasonable.
However, the timing will depend on how opposing forces play out.”
Macklem emphasized that while more rate cuts may be
possible, they are not guaranteed.
One reason for caution is that shelter costs and inflation
in services remain persistent, driven in part by wage increases. As a result,
inflation in these areas has been particularly stubborn.
Ultimately, like the U.S. Federal Reserve, the Bank of
Canada is committed to a data-dependent approach, evaluating the economy and
inflation on a meeting-by-meeting basis. “Our forecast shows inflation
declining gradually,” Macklem noted. “Further cuts are possible, but their
timing will depend on incoming data and what it tells us about the direction of
inflation.”
Will We See Another Rate Cut Before Year’s End?
The financial markets are starting to reflect expectations
of further easing. By the end of the trading session on July 24, yields on
short- and medium-term government bonds had fallen, with the five-year yield
down to 3.30% and the ten-year yield dipping to 3.39%.
Unsurprisingly, market analysts anticipate more rate cuts as
the year progresses, potentially continuing into 2025.
“We expect more rate relief ahead, but it’s important to
remember that the Bank of Canada is data-dependent,” said TD economist Andrew
Hencic in a note. “Decisions will be made on a meeting-by-meeting basis,
factoring in economic conditions and inflation data as it becomes available.
While we’re now in the phase of rate cuts, we expect a gradual reduction of
interest rates through 2025.”
Major banks, including BMO, also foresee further rate cuts
in the coming months. “There’s definitely been a shift in tone,” said BMO chief
economist Douglas Porter. “It seems the bias is now to continue cutting. It
feels like they need a strong reason not to keep cutting.”
What Does This Mean for Homebuyers and Homeowners?
For prospective homebuyers, especially first-timers, the
continued easing of interest rates could provide a boost of confidence.
Variable-rate mortgage holders may also see relief, as lower rates could
translate into reduced monthly payments.
However, the five-year fixed mortgage rate is still hovering
around 6%, according to the Canada Mortgage and Housing Corporation (CMHC).
Additionally, many mortgage holders who will be renewing their mortgages in the
next two years may face a "rate shock."
“Nearly half of all Canadian mortgages are set to renew in
the next two years, many of which were signed when rates were much lower—around
0.5% in 2022, with mortgage rates near 2%,” RBC experts explained. “While rate
cuts are good news, many will still experience higher payments when they
renew.”
The Bank of Canada’s next meeting is scheduled for October
23, 2024. Until then, it appears more rate cuts could be on the horizon,
offering further relief to homeowners and buyers alike.
