The Bank of Canada today reduced its target for the overnight rate to 3¼%, with the Bank Rate at 3½% and the deposit rate at 3¼%.
In a news release, the Bank said the Canadian economy grew by 1% in the third quarter, somewhat below the Bank’s October projection, and the fourth quarter also looks weaker than projected.
“Third-quarter GDP growth was pulled down by business investment, inventories and exports. In contrast, consumer spending and housing activity both picked up, suggesting lower interest rates are beginning to boost household spending,” it said.
“A number of policy measures have been announced that will affect the outlook for near-term growth and inflation in Canada. Reductions in targeted immigration levels suggest GDP growth next year will be below the Bank’s October forecast. The effects on inflation will likely be more muted, given that lower immigration dampens both demand and supply.
“Other federal and provincial policies—including a temporary suspension of the GST on some consumer products, one-time payments to individuals, and changes to mortgage rules—will affect the dynamics of demand and inflation. The Bank will look through effects that are temporary and focus on underlying trends to guide its policy decisions. In addition, the possibility the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.”
The Bank said inflation has been about 2% since the summer, and is expected to average close to the 2% target over the next couple of years.
“Since October, the upward pressure on inflation from shelter and the downward pressure from goods prices have both moderated as expected. Looking ahead, the GST holiday will temporarily lower inflation but that will be unwound once the GST break ends. Measures of core inflation will help us assess the trend in CPI (Consumer Price Index) inflation.”
CPA Canada’s Chief Economist, David-Alexandre Brassard, said this latest move substantiates the Bank’s shifting focus from inflation to the slowing economy.
“Slowing wage growth and unemployment at a seven-year high—excluding the pandemic—signal that the economy needs support,” said Brassard. “The decision to cut rates now will provide relief ahead of potential tariff turbulence under Trump’s administration.”
“While the expected rate cut will ease debt repayment burdens for mortgage holders in particular, it won’t reverse price hikes,” added Li Zhang, CPA Canada’s financial literacy leader. “As the holiday season approaches, Canadians should create budgets and stick to them, resisting the urge to overspend regardless of interest rate cuts.”
Phil Soper, President and CEO of Royal LePage, said: “Starting in late spring 2024, we have seen the Bank of Canada continue to lower the cost of borrowing, a process that has prompted homebuyer demand to steadily rise, with a sharp uptick in activity following their first 50-point cut in October. This latest significant rate cut will help to sustain activity throughout the winter months, typically the slowest period for real estate transactions in Canada.
“Buyers have woken up to the reality that property prices are rising again, and more will feel an urgency to act before affordability erodes. As a result, we are anticipating a ‘pull-ahead’ of activity and an early start to the traditional spring housing market. Adding to this momentum is the change in lending policies that come into effect on December 15th, which we believe will coax more sidelined purchasers to take advantage of their expanded borrowing power.”
Peter Norman, Vice President at Altus Group, said: “I think one of the most important factors since the last rate adjustment is the fact that GDP numbers for the third quarter were surprisingly weak, which tipped the scales in favour of more – and faster – cuts. Yes, the CPI number crept up in October, but not to a worrisome level, so a smaller cut still seemed unlikely heading into this announcement.
“The US is our biggest trading partner, so while we don’t really know yet if trade tariffs will materialize next year, increased trade tensions can affect business investment decisions and investment confidence. These are things the Bank of Canada will do their best to head off and, once again, this points to more easing on the Canadian side.
“The Bank of Canada is a very blunt instrument – the impact of their decisions typically play out slowly over time, so today’s decision may not make an immediate difference to January employment, but will contribute toward a stronger 2025. However, capital flows respond more quickly to relative interest rates and, when that happens, business confidence is just a step behind.
“I expect the bank rate to settle at around 2.5%, which should lay the groundwork for a long-awaited uptick in transactions and development activity.
Ray Wong, Vice President at Altus Group, said: “Even with another decrease, it will take time for companies to get settled again, and not only feel more confident in the market – but start executing in a way that reflects that confidence. Canada is facing a significant challenge on the employment side, and I think that will take some time for the labour market – and the economy at large – to reflect the positive impact of the rate-cutting cycle.
“The Bank of Canada will continue to cut into 2025, but I think the rate at which they do so will ultimately depend on the Federal Reserve. The bid-ask gap is slowly closing, and I think we’re going to see steady increases in activity next year, as a reflection of this year’s rate decisions. Some owners and investors may try to get into the market a little earlier than their competitors, in which case they may come to the table with a slightly higher price to meet the bid-ask gap to secure certain properties. Of course, core assets will always get attention – but ultimately, I think we are looking at a slow and measured start to 2025.”
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