Yesterday, the Bank of Canada announced a significant monetary policy shift, lowering the overnight interest rate by 50 basis points to 3.25%. This marks the second consecutive rate cut of this size and the fifth consecutive reduction overall, signalling an aggressive approach amidst an uncertain economic landscape.
This decision, following October’s drop from 4.25% to 3.75%, has broad implications for the Canadian economy, particularly in areas like real estate, employment, and the cost of living.
A Double-Cut Amidst Economic Uncertainty
The latest rate cut comes as inflation sits at the Bank’s target of 2%, a stability welcomed by many. However, other economic indicators paint a more challenging picture. The unemployment rate has climbed to 6.8%, its highest level since January 2017, excluding the COVID-19 pandemic years. Additionally, the Canadian dollar continues to weaken, now standing at $0.71 against the US dollar, raising concerns about the cost of imported goods.
Economists remain divided on the Bank’s decision. While some, like Nathan Janzen of RBC Economics, argue that lower rates are necessary to support the economy, others, such as Benjamin Reitzes of the Bank of Montreal, warn that aggressive cuts could exacerbate inflationary pressures on key imports like food.
Bank of Canada Governor Tiff Macklem acknowledged these concerns, emphasizing a balanced approach. “A lower Canadian dollar makes Canadian exports more competitive in the U.S. but also increases the cost of imported goods, which we must account for in monetary policy,” Macklem said.
Impacts on the Housing Market
For prospective homeowners, the rate cut is a potential game-changer. Lower rates reduce monthly mortgage payments, making homeownership more accessible. For instance, the recent cut translates to approximately $28 in monthly savings per $100,000 of a mortgage.
This monetary shift comes at a time when the housing market is already showing signs of recovery. In Toronto, November 2024 saw 5,875 home sales — a 40.1% increase year-over-year. Nationally, October recorded 174,458 property sales, marking a 30% increase from the same period last year.
However, this increased activity could also lead to intensified competition among buyers, particularly as new federal housing policies take effect later this week. Changes such as raising the insured mortgage cap from $1 million to $1.5 million could bring more first-time buyers into the market, further driving demand.
Victor Tran, a mortgage and real estate expert at RATESDOTCA, anticipates a surge in buyers opting for variable-rate mortgages to capitalise on falling rates. “While many markets currently favour buyers, this rate cut could be the tipping point that heats up competition,” he says.
Navigating the Challenges Ahead
Despite the positive implications for housing affordability, there are broader economic challenges to address. A weak Canadian dollar and rising unemployment remain critical concerns, highlighting the need for a cautious and strategic approach.
The Bank of Canada’s next announcement on January 29, 2025, will provide further insights into its monetary policy direction. Until then, Canadians are advised to monitor market trends closely, especially those considering entering the real estate market.
