Rate Cut by the Bank of Canada (BoC)

• The BoC made a significant move this morning by cutting the overnight rate by 50 basis points (bps) to 3.75%.
• This follows three consecutive 25 bps rate cuts.
• The market had already anticipated a 90% chance of this 50 bps cut due to:
  • Slower-than-expected GDP growth.
  • Consecutive weak inflation reports.
• The larger cut aims to boost growth faster, addressing missed inflation forecasts.
• Even at 3.75%, the policy rate remains restrictive:
  • It is still 145 bps above the core inflation rate from September.
  • Headline inflation is now below the BoC’s 2% target.

Expectations for Future Rate Cuts

• The policy rate is expected to drop to 2.50% by spring next year.
• Today’s 50 bps cut has increased speculation of another 50 bps cut in December.
• However, further cuts will likely depend on continued weak economic data and low inflation.
  • Wage growth remains strong, and there are concerns about reigniting the housing market, especially with upcoming changes to mortgage insurance rules on December 15.

Impact on the Housing Market

• According to the BoC’s Monetary Policy Report (MPR):
  • Lower rates will help the housing market rebound, increasing resales and renovations.
  • Renovations will be supported by rising house prices.
  • Changes to mortgage insurance rules are expected to boost housing demand.
  • Although population growth may slow, housing demand will stay strong, supporting new construction.
  • However, challenges like limited land availability, zoning restrictions, and a shortage of skilled labor will slow down the pace of new home construction.
  • As a result, demand for housing will likely outpace supply, keeping the market tight.

Changes to Mortgage Rates

• Effective tomorrow, the prime rate will drop to 5.95%, reducing floating-rate mortgage rates.
• The lowest advertised 5-year fixed rate has also dropped by 10 bps this week to 4.09% (according to Mortgage Logic News).

Revised Economic Forecast

• The BoC revised its growth forecast for the second half of the year to 1.75%.
• Third-quarter GDP growth was adjusted down to 1.5% from 2.8% in the July report.
• Inflation is improving faster than expected:
  • Ending this year at 2.1%.
  • Core inflation is at 2.3% and expected to decrease further by 2025.