Strong housing market rebound could slow pace of rate cuts: BoC

A stronger-than-expected recovery in Canada's economy, particularly in the housing market, could lead the Bank of Canada to reconsider its rate-cutting plans, according to recent discussions.

One central bank official is also cautious about declaring victory over inflation, despite it reaching the two per cent target.

On Wednesday, the central bank released minutes from the meeting that led to another 25 basis point cut to its benchmark interest rate earlier this month, marking the third consecutive reduction. This brought the policy rate to 4.25 per cent.

The minutes showed no indication that policymakers considered a larger cut of 50 basis points, but they did explore various scenarios for future rate changes. If economic conditions, including the labour market, worsen in the coming months, the council noted it “may be appropriate to lower the policy interest rate more quickly.”

In an alternative scenario, the current rate cuts could stimulate a stronger rebound later this year and into 2025. The housing market, in particular, could see a quicker recovery, driving up home prices and shelter inflation. The council also highlighted concerns that persistent wage growth could continue to push up inflation in the service sector as productivity declines. In such a case, it might be necessary to slow the pace of rate cuts.

Despite the start of rate cuts, Canada’s housing market has remained relatively stable over the summer, according to the Canadian Real Estate Association (CREA). With further rate reductions expected and no immediate signs of prices surging again, CREA suggested buyers might wait for borrowing costs to fall further. Market analysts predict home sales will rise in the fourth quarter, though not to pre-pandemic levels, given the ongoing high borrowing costs and home prices.

Overall, the governing council noted that inflation had eased "as expected," but the risks were increasingly tilted toward weaker-than-forecast economic growth in the second half of the year. They agreed that if inflation continues to decline as predicted, the policy rate could drop further. However, the council emphasized there is no "predetermined path" for interest rates.

Despite inflation reaching the central bank’s two per cent target in August, Carolyn Rogers, the senior deputy governor of the Bank of Canada, warned that the job isn't done. Speaking at a Bloomberg event, she cautioned that while the inflation target is good news, “there’s still work to do.”

Rogers explained that the central bank needs to ensure that the return to two per cent inflation is "sustainable" and not just a temporary achievement. The bank is looking for core inflation trends to confirm that price pressures will remain stable in the long term.

She also pointed out that some "bumpiness" in inflation figures could occur in the coming months but suggested that depending on the circumstances, the central bank might be willing to overlook some fluctuations.

The broader goal is to achieve a “soft landing,” restoring price stability without triggering a recession. So far, Canada has avoided a recession, though unemployment has been rising, and some economists predict that third-quarter economic growth may fall short of the bank’s expectations.

“We’ve got to stick the landing,” Rogers said.

The Bank of Canada will receive new inflation data, along with updates on labour market and economic activity, before its next policy decision on October 23.