October 23, 2024
The Bank of Canada has taken a significant step by reducing its target overnight rate by 50 basis points, bringing it down to 3.75% deposit rate. This move, paired with a 4% Bank Rate, is part of the central bank’s strategy to support economic growth while normalizing its balance sheet.
Global Economic Outlook
The global economy is expected to expand by around 3% over the next two years, with stronger-than-expected growth in the United States. While China’s growth remains subdued, the euro area is forecasted to experience modest recovery next year. Inflation in many advanced economies has come down in recent months and now aligns with central bank targets, with financial conditions easing further since July. One key factor has been a $10 drop in global oil prices compared to projections from the summer.
Canadian Economy at a Glance
Here at home, Canada’s economy saw approximately 2% growth in the first half of the year, with a slight slowdown to 1.75% anticipated for the second half. Consumer spending is still growing but showing signs of cooling on a per-person basis. Notably, exports have received a boost with the opening of the Trans Mountain Expansion pipeline.
While the unemployment rate sits at 6.5%, the labor market remains soft, especially for younger Canadians and newcomers, despite population growth driving an expansion of the labor force. Wage growth continues to outpace productivity, and overall, the Canadian economy remains in a state of excess supply. However, as interest rates drop, this supply is expected to be absorbed, supporting GDP growth. The Bank of Canada forecasts GDP to grow by 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026, with lower rates driving residential investment and consumer spending.
What This Means for the Housing Market
The reduction in interest rates is expected to stimulate the housing sector, driving residential investment and home sales. As demand for housing remains strong, we anticipate a surge in home renovations and property purchases, providing relief to buyers who have faced challenges with elevated interest rates in recent months. This is positive news for both buyers and sellers, as reduced borrowing costs make homeownership more accessible and could lead to increased real estate activity.
Inflation and Outlook
Consumer Price Index (CPI) inflation has dropped significantly, from 2.7% in June to 1.6% in September. Shelter costs, although still elevated, are beginning to ease. The broader economy’s excess supply has led to falling prices in many sectors, including a welcome reduction in gasoline prices. These combined factors have brought inflation down, with core inflation measures now below 2.5%.
The Bank of Canada expects inflation to remain close to its 2% target over the coming years, with both upward and downward pressures balancing out. Should the economy continue along its current path, we can expect further reductions in the policy rate, potentially giving even more support to economic growth and the housing market.
Looking Ahead
The Bank of Canada’s decision to lower rates signals a commitment to keeping inflation in check while fostering economic growth. For those looking to enter the real estate market, this rate cut represents an opportunity to secure more favorable mortgage terms.
Stay tuned for further updates. The next interest rate announcement is scheduled for December 11, 2024, and we expect to gain more insights into the future of the Canadian economy with the Bank’s full outlook in January 2025.
Freeway Real Estates Inc., Brokerage
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