The Bank of Canada cut its benchmark interest rate by a quarter of a percentage point for the second consecutive time on July 28, 2024. Minutes from the governing council’s latest meeting reveal that while the Bank initially feared that sudden cuts to borrowing costs could drive home prices higher, their concern has now ebbed. The deliberations acknowledged that declining mortgage rates or higher-than-expected population growth could increase demand in the housing market, but delays in building homes might limit supply growth.
Still, the council noted that the reaction in the housing market to the first two rate cuts has been muted, with a small uptick in sales reported in some markets. Resale activity has been “slower than expected” from the central bank’s point of view. The governing council suggested that while residential building investment is hoped to “increase substantially” next year, the imbalance between demand and supply is likely to persist, particularly in urban rental markets where newcomers tend to settle.
Bank of Canada cuts rates again
This could lead to more “upward pressure on rents.”
The central bank also discussed the labour market at length. The unemployment rate has risen to 6.4 per cent, and the central bank expects this trend to continue as the labour force grows faster than employment in the near term.
Concerns that still-hot wage growth would risk inflation progress were present, but the council expressed confidence that wages would cool amid the slackening labour market. The deliberations underscore a shift in the Bank of Canada’s focus from fears of sustained inflation to threats to economic growth. Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, noted that the central bank now sees a clear path to further rate cuts if inflation continues its current trends back to the two per cent target.
Market watchers anticipate more interest rate cuts from the Bank of Canada, with BMO and CIBC projecting a quarter-point cut at every remaining meeting this year. The next interest rate decision is set for September 4.
