Following the Bank of Canada’s latest policy announcement Wednesday morning that saw the central bank deliver a jumbo 50-basis-point cut to its key interest rate, two experts joined BNN Bloomberg to discuss the economic impacts of the decision.
Etienne Bordeleau-Labrecque, fixed income portfolio manager at Ninepoint Partners, said the rate announcement came as no surprise to markets, but called it an “unusual move” by the bank.
“It’s rare that the bank hikes or cuts by more than 25 basis points… it’s a bit of an unusual move but at the same time, it may be a little bit of catching up. Some feel that maybe they were behind the curve a little bit,” he said, adding that headline inflation is now below the bank’s two per cent target.
“I think they have some catching up to do… interest rates are still dragging down the economy and it takes time for interest rate hikes or cuts to make their way through the real economy.”
The central bank’s latest cut brings its trend-setting interest rate to 3.75 per cent. The bank had lowered rates by 25 basis points at its last three decisions prior to Wednesday’s.
Warren Lovely, chief rates strategist at National Bank Financial, said he’ll be tracking the latest economic data in the months ahead to determine the Bank of Canada’s next steps, but the bank’s October monetary report, also released Wednesday, hints at their current thinking.
“The Bank of Canada unfortunately doesn’t give us a full suite of economic indicators and economic forecasts to judge, but the two big ones are GDP growth and inflation,” he said.
“At least what we’ve seen more recently has been disappointment on both fronts and downward risks; slower growth and lower inflation than they had thought, so those are the two indicators we’ll be continuing to watch very, very carefully.”
Eyes on the labour market
Lovely said another important data point will be the unemployment rate, which he called “one of the biggest bellwether indicators” of underlying economic strength.
“We saw a brief, maybe, reprieve in the weaker unemployment rate story that has really been a narrative for about 18 months now,” he said.
“Let’s see if that continues and resumes. If that’s the case, the Bank of Canada is going to need to continue to lower interest rates.”
Canada’s unemployment rate ticked down last month for the first time since January, falling to 6.5 per cent from 6.6 per cent in August. But Lovely said he expects the upward trend in unemployment to resume going forward as still-elevated interest rates continue to weigh on employers.
“I think the unemployment rate’s going to be moving back up very shortly to seven per cent or beyond seven per cent, and if we get into that type of area code on the unemployment rate, 3.75 per cent on the Bank of Canada policy rate will not be appropriate,” he argued.
Outlook for real estate
Bordeleau-Labrecque said that while periods of rate relief have historically led to increased activity in the housing market, he expects the challenges being faced by Canada’s real estate industry to continue.
“Look at mortgage rates; if the Bank of Canada doesn’t cut a lot more than what’s currently expected by markets, moving to two and three quarters per cent by the middle of next year, mortgage rates are not going much lower,” he said.
“Don’t expect a whole lot of real estate or construction activity to pick up in this kind of environment where interest rates are still somewhat elevated (and) mortgage rates are still too high relative to the cost of homes.”
The Bank of Canada’s next interest rate decision – its last in 2024 – is scheduled for Dec. 11.
With files from The Canadian Press