2 Rate Cuts, Now What ?
The Bank of Canada has cut interest rates for the second time this year, on July 24th it cut 25 basis points. It cut its benchmark interest rate for the first time in four years back on on June 5 of this year. There are so many more questions to ask in this volatile, interest rate sensitive economy, such as, why are they cutting, what does this cut mean for buyers, sellers and mortgage holders, are there more cuts to come & if so, when, and why we are seeing rate cuts and is that a good thing for Canadians?
Key Takeaways:
The Bank of Canada cut interest rates by 25 basis points on July 24, 2024, marking its second cut of the year. This follows an initial cut in June 2024 after a prolonged period of high rates.
The Bank of Canada had previously raised interest rates aggressively from March 2022 to July 2023, increasing its benchmark rate from 0.25% to 5%. This period was one of the most aggressive monetary policy tightening campaigns on record.
Inflation, which peaked at 8.1% in June 2022, has decreased significantly, with the CPI inflation rate falling to 2.7% in June 2024. High shelter costs, including mortgage interest and rent, remain a significant driver of inflation.
The Bank of Canada is focusing on downside risks to economic growth rather than just inflation. There is uncertainty about whether the recent cuts will continue or if the Bank will pause based on evolving economic data as the Bank of Canada aims to bring inflation closer to its 2% target. Current forecasts suggest a gradual easing of inflation and a potential return to a neutral interest rate range by late 2025, assuming no major economic shocks occur.
There's a mixed sentiment among economists and policymakers regarding the potential for a recession. For instance, Desjardins' Randall Bartlett, emphasize a growing concern about recession risks, while others focus on the technicalities of GDP growth and per capita impacts, highlighting a "me session" where individuals feel the pinch despite overall GDP growth.
Rate cuts could benefit mortgage holders, especially those with variable rates. Significant savings are anticipated if rates decrease as predicted, which would alleviate some financial burdens for existing homeowners and make variable rates more attractive to new borrowers.
The impact of rate cuts and economic conditions varies significantly across Canada. While regions including Alberta may benefit more immediately from rate cuts due to their already strong economic conditions, areas including Ontario face more significant challenges.
There's a noticeable shift in consumer behaviour towards variable rate mortgages, although it's still far from the peak seen during the pandemic. This shift indicates a cautious optimism among borrowers looking to capitalize on potential rate cuts.
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I think were are in a place right now where what happens going forward is anyone's guess. There are so many variables at play here. I just hope that the real estate frenzy does not re-ignite, and frankly, I do not think it will. These last 10 years of cheap money will not be repeated for a long while, and never ,if any historic lessons are learned ( though, unfortunately, history does have a way of repeating itself). If the BoC lowers those interest rates rapidly, we will have more to worry about than just housing. Even with more rate cuts, the world's economic volatility and Canada's debt and recessionary issues, will prevent people from taking on large housing debt. Who wants to be shackled to bricks and mortar for the rest of one's life.