Yesterday, the Bank of Canada (BoC) announced a 25 basis point reduction in its interest rate, lowering it to 4.75%. This significant policy shift comes after more than four years of elevated rates, as predicted by numerous economists.

Since March 2022, the BoC had steadily increased its policy rate from 0.25% to 5% by July 2023 to tackle inflation. The rate then stayed at a 22-year high, leading to canceled condo projects, decreased home prices, and fewer real estate transactions. Experts quickly weighed in on the implications for Canadians and the housing market.

Anticipating More Rate Cuts

  • Douglas Porter, BMO Economics: This initial reduction marks a pivotal turn from over two years of tight monetary policy. While this cut might not be the deepest, the central bank’s tone was “a bit more dovish than expected.” Future rate hikes will depend on clear signs of easing inflation.
  • James Laird, Co-CEO of and President of CanWise: Identifies this stage as the fourth phase of the pandemic-related rate policy, involving a move toward a less restrictive rate environment. “Typically, a single rate cut leads to more,” indicating that borrowers will be particularly interested in the BoC’s target rate and timeline.
  • Adam Jacobs, Senior National Director of Research at Colliers: Yesterday’s announcement signals a significant policy shift. The BoC governor expects further cuts if inflation remains manageable, with lender forecasts predicting aggressive cuts, potentially dropping target rates to between 2.75% and 3.5% by the end of 2025.

Relief for Variable Mortgage Holders

  • Variable Rate Mortgage Holders: Will benefit from the reduction, saving the average homeowner around $100 per month.
  • RBC Economics: If lenders lower their prime rates in response to the BoC cut, variable rate mortgage holders could see reduced regular payments or increased contributions to their principal, helping to pay off mortgages faster. However, those renewing their mortgages will still face higher rates compared to 2022.
  • Fixed vs. Variable Rate Mortgages: With government bond yields dropping, fixed mortgage rates are expected to decrease, prompting potential buyers to reconsider variable rates as the BoC enters a rate-cutting phase.

Impact on Housing Demand

  • Housing Demand: A critical question is when rate cuts will significantly boost housing demand. Laird speculates on whether this initial reduction will reignite the fear of missing out (FOMO) in the housing market or if buyers will wait for further cuts.
  • RBC Economics: Yesterday’s cut may not immediately lower mortgage costs, but it could encourage potential buyers to intensify their home searches as confidence in the economy grows. This could lead to improved housing affordability and more options for buyers.
  • Housing Supply: Recent high borrowing costs have led to a decline in real estate development and investment. Jacobs sees yesterday’s cut as a positive step toward meeting housing demand, which has stalled due to high rates.

Canada’s Unique Approach

  • Policy Divergence: Canada is the first major economy to cut rates, diverging from the US, UK, and European policies. Differing economic conditions in the US necessitate an independent approach for Canada.
  • Future Cuts: Porter emphasized that the BoC’s future cuts would depend on economic data, including inflation, GDP, and jobless rates. Upcoming CPI reports will be crucial in determining the BoC’s next move in their July 24 decision.

As Canadians adapt to this new era of monetary policy, attention will be on how these changes impact their finances and the broader economy.