The Bank of Canada’s top decision-makers expressed concerns before announcing this month’s interest rate cut, fearing that the rate relief could potentially overheat the housing market.
That’s according to the latest summary of deliberations from the Bank of Canada’s June 5 monetary policy meeting, where its six-member Governing Council voted to cut the benchmark rate from 5.00% to 4.75%.
In making the decision, council members expressed increased confidence that inflation would continue its progress toward the 2% target, particularly as the Bank’s preferred measures of core inflation have declined for four consecutive months.
“They also agreed that if inflation continued to ease and remained on a sustainable track to the 2% target, it was reasonable to expect further cuts to the policy interest rate,” the summary reads.
They noted that easing is expected to be gradual, matching the projected steady decline in inflation until it reaches the neutral target in 2025. Since the timing of further rate cuts will depend on incoming data, members agreed that monetary policy decisions would be made “one meeting at a time.”
Risks for the path of inflation
Although inflation continues to trend lower, members did spend some time discussing some of the risks to the future path of inflation and economic growth.
They noted that cuts to the policy rate “could lead to an overheated housing market, given pent-up demand.”
An overheated housing market could drive up prices, potentially reigniting inflationary pressures and complicating the Bank’s efforts to maintain stable economic growth.
Members also flagged risks to economic growth as consumers rein in spending in response to higher payments when their mortgage term renews. The Bank of Canada estimates that roughly 80% of all mortgages outstanding as of March 2022 will be up for renewal by the end of 2024.
“The large number of households renewing mortgages at higher rates and with higher payments in 2025 could curb spending and dampen economic activity and inflation more than expected,” the summary noted.
On the other hand, members also acknowledged that consumption could rebound more than expected as consumer confidence recovers, while “persistently strong wage growth” and weak productivity could lead to inflation pressures.
According to a report by Oxford Economics economist Michael Davenport, mortgage payment shock will hit households in the coming months, leading to a decline in consumption in Q2 and Q3, potentially “helping push the economy into a modest recession this year.”
That could drive the Bank of Canada’s policy rate from 4.75% to 2.25% by late 2026, Oxford is forecasting.
However, if the economy avoids a downturn, labour markets remain resilient, wage growth doesn’t slow, or if house prices rebound too quickly, the central bank’s easing path could be at risk.
If any of those scenarios materialize, “the Bank may delay easing and hold the policy rate higher for longer, or even resume hiking later this year,” Davenport warns.
The Bank of Canada’s next rate decision is scheduled for July 24.
2% inflation Bank of Canada BoC deliberations deliberation summary downturn inflation Michael Davenport mortgage renewals Oxford Economics renewals summary of deliberations
Last modified: June 20, 2024
I understand that BOC is worried that rate cuts might overheat the housing market. So what about those people who were fool enough to buy the home when the interest rates were down in early 2022 and they are finding to extremely challenging to make their high mortgage payments and see their home value getting lose value since BOC started increasing rates. They were not aware what BOC is going to do in later part of 2022 and 2023, increasing the rates at a very rapid pace. Does BOC worry or care about those people as they are also part of Canada ? Do they discuss about those people in their discussions or have any advice for those people who are being robbed of their hard earned money by reckless increase in rates and depreciating home values since their aggressive rate hikes began ? Should those people hang themselves and commit suicide or BOC has any solution for it or do they even discuss such things in their meetings? Such people only crime was that they bought a home in early 2022. We have seen people very tense, struggling with health reasons and some have actually left Canada and some have committed suicide.
nobody forced you to buy a home, understand finances before you make bad choices