Beleaguered Canadian homeowners and renters buckling under the strain of skyrocketing housing costs may finally see a glimmer of relief on the horizon. Many economists predict the Bank of Canada could start gradually reducing interest rates by mid-2024 to prevent the economy from plunging into a deep recession.
In a notable pivot away from previous guidance, Bank of Canada Governor Tiff Macklem recently signaled that rate cuts may materialize even before inflation returns to the 2% target. “We don’t need to wait until it’s back to 2%,” Macklem commented, noting that reductions could come once inflation is clearly heading downwards in a sustainable way.
This statement has led numerous experts to forecast that the benchmark overnight rate will likely peak at around 5% by mid-2023 before beginning a cautious descent. The BoC appears intent on avoiding overshooting with excessive hikes that could ultimately trigger an economic downturn. The full impact of rate changes takes 18-24 months to truly permeate the economy.
“The Bank is still laser focused on reaching 2% inflation,” explained Beata Caranci, Chief Economist at TD Bank Group. “But there are risks associated with keeping policy too restrictive for too prolonged of a period.”
Caranci believes a recessionary overcorrection could potentially be sidestepped by carefully measured rate cuts once inflationary pressures show meaningful easing. However, borrowing costs would remain relatively high compared to the ultra-low rate environment of the past decade. This is aimed at restraining unnecessary spending and cooling rate-sensitive sectors.
“Homeowners will still be renewing mortgages into a higher rate environment,” Caranci elaborated. “They won’t get the same degree of monetary stimulus as we saw in the past.”
Some experts note that high interest rates have squeezed housing affordability and kept inflation stubbornly elevated. Home prices have also been stickier on the way down than many anticipated earlier in the rate hike cycle. This limited degree of cooling has surprised observers.
“Lower home prices should have offset some of the huge gains in mortgage costs and rents, but it hasn’t to the degree expected,” pointed out David Macdonald, Senior Economist at the Canadian Centre for Policy Alternatives.
This begs the question – once rate cuts do materialize as projected, could it risk re-igniting the housing frenzy that defined the pandemic era? This is a concern top of mind for policymakers. But Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, argues shelter costs are already “very high.” Skyrocketing mortgage payments and rents have hammered affordability.
“The rates are pushing a lot of would-be first-time homebuyers out of the market and driving rental costs up even more,” Mendes emphasized. “Given how unaffordable things are currently, I’m not too concerned that measured cuts would automatically create explosive housing growth again.”
Mendes notes housing supply is a major structural challenge. Enabling builders to construct more through lower rates can help on that front without spurring runaway price surges. Supply remains constrained after all.
“Fewer homes are being built today compared to the lowest point during the pandemic lockdowns in 2020,” Mendes observed. “Construction will keep sliding unless rates ease a bit. As long as inflation is below 3%, the Bank of Canada should weigh the trade-offs before it hits 2%.”
Categories: Economic History
The Fourth Estate 
Leave a comment