The Central Bank of Canada recently demonstrated reduced concerns regarding the rapid increase in home prices as it made adjustments to its benchmark interest rate, based on the minutes from its latest governing council meeting. Deliberations from the July 24 meeting, where the central bank implemented its second consecutive quarter-point rate cut, were made public on Wednesday.
The Bank of Canada’s top monetary policymakers engaged in discussions about potential risks to the inflation outlook and the broader Canadian economy, including factors such as immigration levels, wage pressures, and the state of the housing market. Previous discussions indicated that the governing council closely monitored housing activity as it approached a lower policy rate, fearing that sudden reductions in borrowing costs could lead to a surge in home prices and undermine efforts to control inflation.
However, the latest release reveals a shift in this concern, suggesting that worries about immediate spikes in house prices due to policy rate cuts have subsided. The governing council acknowledged the possibility of declining mortgage rates or higher-than-anticipated population growth fueling demand in the housing market, while also highlighting the potential for delays in home construction to constrain supply growth.
In response to the initial interest rate cuts in June and July, the housing market has seen a modest increase in sales activity, though the pace of resale activity was characterized as slower than expected by the central bank. Despite expectations for a significant rise in residential building investment in the coming year, the governing council noted that demand-supply imbalances are likely to persist, particularly in urban rental markets where new residents often settle.
Additionally, concerns were raised about housing affordability issues barring renters from entering the ownership market, potentially leading to upward pressure on rents. Notably, the central bank emphasized the changing demographics due to immigration, expecting a rise in the share of non-permanent residents in the population, adding a level of uncertainty to the economic outlook.
The governing council also devoted significant discussion time to the labor market, noting a rise in slack with the unemployment rate climbing to 6.4 per cent. This trend is expected to endure as the labor force outpaces employment growth in the near future. Looking ahead, policymakers anticipate reviewing the July employment figures from Statistics Canada on Friday.
Regarding inflation pressures, concerns persisted that strong wage growth could impede progress in managing inflation, particularly in service prices. However, the governing council expressed confidence that wage growth would moderate as the labor market slackens. The council emphasized a collective agreement on the need for further policy rate cuts if inflation continues to deviate from the two per cent target.
As the central bank’s focus shifted to guarding against a potential dip in inflation levels past two per cent, financial analysts indicated a clear path for additional rate cuts to stimulate economic growth. Both BMO and CIBC projected a total of 75 basis points in rate cuts for 2024, recommending quarterly cuts for the remainder of the year. The Bank of Canada’s next interest rate decision is scheduled for September 4.
