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Bank of Canada Holds Interest Rate Steady at 5%

On October 25, the Bank of Canada opted to maintain the overnight interest rate at five percent, underscoring its commitment to quantitative tightening. It acknowledged the influence of global bond yields in curbing demand, noting that the worldwide economy is decelerating, primarily due to previous policy rate hikes and a recent surge in global bond yields.


In Canada, the central bank observed mounting evidence that past interest rate increments are tempering economic activity and alleviating price pressures.


Bank of Canada Governor Tiff Macklem
Bank of Canada Governor Tiff Macklem

Real Estate Market Impact: This has been particularly felt in the real estate sector, where demand has shown signs of softening, likely in response to the higher borrowing costs.


Nevertheless, despite the discernible effects of their monetary policies on spending and price dynamics, the Bank remains wary of the sluggish progress towards price stability and heightened inflationary risks. They are prepared to raise the policy rate further should the need arise.


The Governing Council emphasized their desire to witness a downward trend in core inflation and emphasized their continued focus on balancing demand and supply, inflation expectations, wage growth, and corporate pricing behavior.


Recent months have witnessed volatility in the Consumer Price Index (CPI) inflation — recording at 2.8 percent in June, four percent in August, and 3.8 percent in September. This is attributed to elevated interest rates moderating price increases in goods purchased on credit, a trend extending into services.

Bank of Canada Holds Rate Hike at 5% Graph


Real Estate Market Insight: While food inflation is showing signs of easing from previously elevated rates, high mortgage interest costs and inflation in rent and other housing expenses persist. This adds additional pressure on an already strained real estate market.


Near-term inflation expectations and corporate pricing behavior are experiencing gradual normalization, while wages continue to grow between four and five percent.


The Bank of Canada projected that inflation will average around 3.5 percent through the middle of the next year, gradually easing to two percent in 2025. Achieving this two percent target in the near term is expected to be more challenging due to higher energy prices and the continued persistence in core inflation.


Domestic consumption has been restrained, with softer demand for housing, durable goods, and various services.


Real Estate Market Impact: This moderation in demand for housing may have implications for the real estate market, influencing factors like property prices and sales volumes.


Concurrently, weaker demand and increased borrowing costs are impacting business investment. The surge in Canada's population is alleviating labor market pressures in certain sectors, while also contributing to heightened housing demand and consumption.


Overall, a range of indicators suggests that supply and demand in the economy are approaching equilibrium. The Canadian economy is anticipated to grow by 1.2 percent this year, 0.9 percent in 2024, and 2.5 percent in 2025.


On a global scale, GDP growth projections have seen minimal changes since July, though there have been shifts in composition, notably with China's performance weaker than anticipated, while the United States economy has demonstrated greater resilience.


Andrew DiCapua, a senior economist at the Canadian Chamber of Commerce, interpreted the rate hold and the accompanying statements as a clear indication that monetary policy is effectively slowing the economy, especially with interest rates at their highest point in two decades. However, he cautioned that the confluence of high business costs and a high cost of living could potentially lead to a recession.


Real Estate Market Outlook: This environment may pose challenges to the real estate sector, with potential implications for property values, transactions, and overall market health.


The rate hold reflects positive news for homeowners grappling with rising mortgage payments and impending renewals in the coming years. While home prices may experience a cooling period between the peak of interest rates and their subsequent decline, the pause in rate hikes suggests that the end of such increases may be on the horizon, offering relief to homeowners.


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