The Bank of Canada has downplayed concerns about a potential spike in housing prices as it continues to lower its benchmark interest rate, according to the minutes from its latest meeting.
The July 24 meeting, which led to a second consecutive quarter-point rate reduction, was detailed in minutes released on Wednesday. During the session, central bank policymakers assessed risks to inflation and the broader Canadian economy, considering factors like immigration, wage pressures, and the housing market.
In the past, the governing council had been cautious about reducing interest rates, worried that lower borrowing costs could lead to a surge in home prices, complicating efforts to control inflation. However, the recent discussions indicate that these concerns have lessened. The council recognized that while falling mortgage rates or unexpected population growth might increase housing demand, especially given supply constraints from delayed construction, the chances of a significant rise in house prices due to rate cuts have diminished.
The housing market’s response to the recent rate cuts has been modest, with only slight sales increases in some areas. The central bank noted that resale activity has been slower than expected. Even though a significant rise in residential building investment is anticipated next year, the council expects the supply-demand imbalance to continue, particularly in urban rental markets where many new residents tend to settle.
Ongoing challenges in housing affordability were also highlighted, with the possibility of further rent increases. Immigration trends were a recurring topic, with expectations that the proportion of non-permanent residents will grow, despite attempts to limit the influx of temporary workers and students, adding a layer of uncertainty to the economic outlook.
The discussions also touched on the labor market, noting an increase in unemployment to 6.4 percent and the expectation of persistent slack as the labor force expands faster than employment. The central bank remains optimistic that wage growth will slow as the labor market eases. Policymakers agreed that additional rate cuts might be necessary if inflation trends continue towards the 2 percent target.
Market analysts have noticed a shift in the Bank of Canada’s emphasis towards concerns over economic growth rather than inflation risks. Both BMO and CIBC predict further rate cuts in 2024, with the next interest rate decision set for September 4.
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