The announcement Canadian homebuyers – and would-be homebuyers – have been waiting for could be just days away. RBC Economics is doubling down on its forecast that the Bank of Canada (BoC) will finally kick-start its easing of sky-high interest rates on Wednesday, June 5th. Mid-May, RBC Economics indicated that there would be some relief on Canada's interest rate front come June. And, as we move closer to the big day, their forecast hasn't changed.
In a report released today, RBC economists Claire Fan and Nathan Janzen write that “all ducks appear to be in a row” for Canada’s central bank to lower the overnight rate by 25 basis points to 4.75% next week. The rate has been held at 5% since July 2023 – something that’s resulted in a slump in both real estate transactions and home prices across the country.
As the report highlights, the anticipated rate hike follows recent rate cuts from the Swiss National Bank and the Riksbank (central bank of Sweden).
“Evidence has continued to build that the current high level of interest rates is no longer needed,” reads the report. “The Canadian economy has softened significantly. Gross domestic product per capita posted another decline in Q1 this year. Inflation pressures have also slowed with the closely watched three-month growth rate (annualized) in the BoC’s preferred median and trim core consumer price index measures both running below the 2% inflation target in April.”
Inflation storeys.com
This slowing economy, write Fan and Janzen, raises confidence that Canada will see continued lower inflation readings, despite signs of a reacceleration in a stronger economy south of the border. The report points out that Bank of Canada Governor Tiff Macklem’s conditions for lower interest rates appear to be in place. At the last rate announcement, Macklem hinted that rate cuts were in store, but he needed to see signs that inflation pressures were trending lower. “The two CPI reports since then have both surprised on the downside and should provide the BoC with enough evidence,” reads the report.
While a rate cut does indeed appear to be on the horizon, Fan and Janzen say that BoC will likely “maintain a cautious tone” when it comes to the pace of subsequent rate hikes. Indeed, slow and steady has been the name of the game for central bank in the tumultuous political and economic climate of recent years. As the report highlights, Macklem says price pressures could still potentially resurface due to global geopolitical conflicts and faster increases in wages and/or home prices domestically.
While we’re not out of the woods yet, the economists state that there’s little sign of domestic price pressures accelerating. “Labour market conditions have continued to cool over the spring as hiring demand slows,” they write. “We expect next week’s labour market data will show more softening in May with a small 15,000 gain in employment and another tick higher in the unemployment rate to 6.2%.”
The report makes note of Canada’s weakened housing market, a clear by-product of buyers being challenged by high borrowing costs and high prices. “Wary of those risks, the BoC will likely continue to suggest that the pace of additional easing will be slow and gradual,” reads the report. “Still, we expect that, ultimately, a softer economy will keep inflation pressures moving lower in Canada. Contingent on that outlook, we look for 100 basis points of interest rate cuts this year that will leave the overnight rate at a still restrictive 4% by the end of 2024.”
So, it’s safe to assume we won’t see the floodgates open to a slew of buyers on the market quite yet. A clear change from a typically bustling spring selling season, the Canadian real estate market will likely maintain its state of relative calm as we move fully into the summer months.
