Before announcing the Bank of Canada’s rate reduction this month, the Bank’s senior decision makers expressed concern that the relief in rates could overheat housing markets.
According to the most recent Summary of Deliberations The Bank of Canada Meeting on June 5, monetary policy. Its six member Governing council voted to reduce the benchmark rate to 4.75%.
Council members were more confident in their decision to make, as they expressed a greater confidence that the inflation rate would progress towards the Bank’s 2% inflation target. This is especially true since the Bank’s preferred core measures have been declining for four months.
The summary states that “they also agreed to further cut the interest rate if the inflation continues to decline and remains on track towards the 2% goal.”
The members noted that the easing will be gradual and in line with the steady fall in inflation projected until 2025, when it is predicted to reach the neutral rate. The timing of future rate cuts depends on the incoming data. Members agreed to make monetary policy decisions “one meeting per time” since it will be dependent upon incoming data.
The path of inflation: Risks
Members spent some time talking about the possible future risks of economic growth and inflation.
The note noted that a reduction in the policy rate could “lead to an overheated market for housing, due to pent up demand.”
A hot housing market can cause prices to rise, potentially re-igniting inflationary forces and complicating Bank efforts to maintain stable growth.
The members also warned of risks for the economy as consumers reduce their spending due to increased payments at renewal time. Bank of Canada predicts that 80% of mortgages in existence as of March 20, 2022, will need to be renewed by 2024.
The summary stated that “the large number of homeowners renewing their mortgages in 2025 at higher rates with increased payments could dampen the economic activity and inflation much more than anticipated.”
Members also admitted that consumer confidence could recover more quickly than anticipated, and “consistently high wage growth” could cause inflation.
A report from Oxford Economics economist Michael Davenport states that mortgage payment shock is likely to hit the households over the next few months. This will lead to a drop in consumption during Q2 and Q3, possibly “helping to push the economy into modest recession in this year.”
Oxford forecasts that the Bank of Canada policy rate could drop from 4.75% down to 2.25% in late 2026.
If the economy does not experience a recession, wages continue to grow, and the labour market is resilient, then the central bank’s eased monetary policy could be put at risk.
Davenport cautions that if any of these scenarios occur, the Bank could delay its easing, hold higher policy rates for longer or resume raising them later in the year.
Next rate decision by the Bank of Canada is set for 24 July.