Bank of Canada’s Rate Cuts Continue: Economic Outlook and Housing Market Impact

Earlier in September, the Bank of Canada lowered the overnight policy rate by 25 basis points to 4.25%, marking its third consecutive reduction since June. This decision reflects easing headline and core inflation and the need for economic growth to align with the target inflation rate of 2%.

While overall economic weakness continues to lower inflation, rising shelter costs and certain service prices still exert upward pressure. The economy grew by 2.1% in the second quarter, bolstered by government spending and business investment, but recent indicators suggest potential softening. The unemployment rate has risen to 6.4%, particularly affecting youth and newcomers, contributing to slower wage growth.

The central bank expects inflation to continue easing in the coming months but remains cautious about the risks of both excessive disinflation and inflationary pressures. Governor Macklem has emphasized the Bank’s commitment to price stability, with decisions informed by ongoing economic data.

National home sales have seen slight increases following recent interest rate cuts, but the market remains largely stagnant as buyers await improved affordability. Inventory has dipped slightly, and home prices have stayed flat, averaging around $667,317. Anticipated further rate cuts and new government measures, including 30-year mortgages for first-time buyers, may eventually boost demand and improve market conditions.

On the inflation front, the Consumer Price Index (CPI) rose by 2.0% year over year in August, the slowest since February 2021, indicating potential shifts in the Bank of Canada's monetary policy. Governor Macklem hinted that a larger rate cut could be possible if inflation continues to decline alongside rising unemployment.

While overall inflation is easing, mortgage interest costs and rent remain significant contributors. Monthly declines in categories like air transportation and clothing set the stage for the Bank's upcoming rate decision later this month, with markets speculating on a possible substantial cut.

The Bank of Canada has two key decision dates: October 23 and December 11. Chief Economist Dr. Sherry Cooper notes that during these meetings, it is widely expected that the Bank will continue its quarter-point rate cuts, reducing the overnight rate to 4.0% by the end of the year and further down to 2.75% next year. Stay tuned for more updates!