Canada Housing Market

The Bank of Canada’s upcoming rate-setting announcement on Wednesday is attracting significant attention. While some expect a rate cut, the central bank’s decision could have substantial implications for the economy, especially if they choose to hold rates steady.

The Current Economic Landscape

The anticipation surrounding this announcement is fueled by the economic context. Since March 2022, the Bank of Canada has steadily increased rates, but with inflation now decelerating sharply, many economists argue that maintaining the current rate of 5% may be overly restrictive. CIBC Capital Markets’ chief economist, Avery Shenfeld, believes a rate cut is well justified given the current economic conditions.

Economic Growth and Inflation

Canada’s economy grew at an annualized rate of 1.7% in the first quarter of 2024, falling short of both the Bank of Canada’s forecast of 2.8% and economists’ estimates of 2.2%. Moreover, the previous quarter’s growth was revised downward from 1% to just 0.1%. Despite these indicators, not everyone is convinced that a rate cut is imminent.

Market Expectations and Volatility

The market is divided on the likelihood of a rate cut. The CME’s FedWatch Tool indicates a minimal chance of a cut in June, while some market signals suggest a stronger possibility. This divergence in expectations means that the announcement, regardless of its outcome, will likely cause market volatility. According to Douglas Porter, chief economist at Bank of Montreal, short-term bonds, money markets, currency, long bonds, and interest-sensitive equities will all react significantly to the decision.

Potential Impact on Borrowers and the Housing Market

An interest rate cut would mark a significant shift in monetary policy, providing relief to borrowers and potentially boosting the housing market. The recent period of higher rates has strained businesses and households, and Canada’s largest banks are closely monitoring the central bank’s decisions to adjust their credit loss provisions accordingly.

The Path Forward

Economists, including James Orlando from Toronto-Dominion Bank, argue that the Bank of Canada has not yet signaled a move towards rate cuts despite favorable inflation dynamics. The latest gross domestic product (GDP) data supports the case for a rate cut, indicating that inflation is no longer a broad-based issue.

Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, notes that the consumer price index (CPI) excluding shelter costs is at 1.2%, with only one-third of the CPI basket growing above 3%. This suggests that inflation is on a clear downward path, reducing the need for restrictively high rates.

What to Watch For

As the Bank of Canada prepares to announce its decision, markets will be looking for any signals regarding future rate cuts. Even if a cut is not implemented in June, a strong message indicating a forthcoming rate reduction could stabilize market expectations and provide comfort to borrowers.

The decision is poised to impact various sectors, particularly the housing market, which could see renewed activity with the start of rate cuts. The coming weeks will be crucial as the central bank navigates its monetary policy amid evolving economic conditions.

Source: Bank of Canada expected to cut or signal interest rate cut in June | Financial Post