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Bank of Canada officials worry that rate cuts may overheat the housing market

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.

Tiff Macklem and Carolyn Rogers

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.

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Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.

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