New Bank of Canada Announcement: Bank of Canada reduces policy rate by 25 basis points to 4.5%

The Bank of Canada has announced an interest rate cut to 4.5%. This decision aligns with the Bank's ongoing policy of balance sheet normalization, showing positive signs for the real estate market. 

Global and Canadian Economic Outlook

The global economy is projected to expand at an annual rate of approximately 3% through 2026, despite inflation remaining above targets in many economies. In the US, an anticipated economic slowdown is evident, while the euro area shows signs of growth recovery. China's economy is growing modestly, supported by strong exports despite weak domestic demand. Overall, global financial conditions have improved, marked by lower bond yields, buoyant equity prices, and robust corporate debt issuance.

Closer to home, Canada's economic growth likely accelerated to around 1½% in the first half of 2024. Despite this, robust population growth of about 3% means the economy's potential output is still outpacing GDP, leading to increased excess supply. Household spending, including housing, has been weak, and the labour market shows signs of slack with an unemployment rate of 6.4%.

Implications for the Canadian Real Estate Market

The forecast for GDP growth in Canada is positive, with projections of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026. This growth is expected to be driven by stronger exports, recovery in household spending, and increased business investment. Notably, residential investment is anticipated to grow robustly, providing opportunities for home buyers and investors.

With the Bank of Canada reducing the policy interest rate, borrowing costs are expected to ease, making mortgages more affordable. This could stimulate housing market activity, encouraging both buyers and sellers. Additionally, the government's new limits on admissions of non-permanent residents are projected to slow population growth in 2025, which may influence housing demand dynamics.

Inflation and Its Impact on Housing

CPI inflation moderated to 2.7% in June after a rise in May, with broad inflationary pressures easing. The Bank’s measures of core inflation have been below 3% for several months. However, shelter price inflation remains high, driven by rent and mortgage interest costs, making it the largest contributor to total inflation.

For the real estate market, this means that while overall inflationary pressures are easing, housing costs remain a significant concern. As the economy strengthens and borrowing costs decline, we can expect increased residential investment, potentially leading to a more competitive housing market.

Looking Ahead

The Bank of Canada's decision to lower the policy interest rate reflects ongoing efforts to balance economic growth and price stability. For those in the real estate market, staying informed about these economic indicators is essential. Lower borrowing costs may present an opportune time for buyers to enter the market or for sellers to capitalize on increased demand.

The next scheduled date for announcing the overnight rate target is September 4, 2024. Keeping an eye on these updates will help buyers and sellers make informed decisions.

For more information, visit the Bank of Canada’s press release.

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Note: This blog post is for informational purposes only and should not be considered financial or investment advice. Please consult with a qualified professional for personalized guidance related to real estate and investment decisions.