Experts welcome today’s cut in a key interest rate, because it will provide immediate financial relief, while encourage both the construction and sale of housing. But they are also tempering expectations.
The Bank of Canada Wednesday (June 5) announced it would cut the policy interest rate by 0.25 per cent to 4.75 per cent. It is the first cut since March 2020 when the emerging COVID-19 pandemic saw countries around the world cut interest rates to dampen an economic downturn. Interest rates have been rising since early 2022 and hit five per cent in July 2023, the highest rate in more than two decades.
Gary Aulakh, Mortgage Specialist at TD, said variable mortgage rate holders will immediately feel the impact. Others with lines of credit linked to prime rate will also see changes, Aulakh added.
"An average-sized mortgage, which is $500,000, this reduction, just using basic math, would result in approximately $125 to $130 (per month) in terms of payment change," he said, adding that these numbers fluctuate based on the size of the mortgage and the rate.
Marc Lee, B.C. senior economist with the Centre of Policy Alternatives, said the decision makes it more attractive to build housing.
“Financing costs are a really huge barrier right now and…a lot of projects have been put on the sidelines, if not, cancelled outright due to financing costs,” he said. “So this will definitely help at a time when we have all recognized the need for increased housing supply given the overall situation.”
Brendon Ogmundson, chief economist with the British Columbia Real Estate Association, predicts the cut will have a positive effect on the demand side. “We are already seeing a bit of an uptick in smaller markets around the province, but I suspect this move may help the Lower Mainland and Interior markets in coming months,” Ogmundson said.
But all three caution against undue expectations. Lee said the cut will mostly impact individuals on variable mortgage rates.
“So those are folks who have had unpleasant surprises during the whole interest rate tightening cycle,” Lee said. “Those folks should see fairly immediate relief on their mortgages.” Mortgages rates tend to follow the policy interest rate. “What’s bad, it’s only 25 basis points, so I don’t think you are going to see a huge difference, but at that point, every bit counts.”
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Ogmundson added the impact on fixed mortgage rates might “not be that significant” noting markets have already been anticipating falling rates.
“As a result, (five)-year fixed mortgage rates have likely already priced in the entirety of expected rate cuts,” Ogmundson said. It will also take some time for variable rates to fall under the average 5-year fixed rate, he added.
Ultimately, Lee, Ogmundson and Aulakh anticipate future interest rate cuts, but noted that broader economic conditions will ultimately determine their pace. Aulakh said the Bank of Canada made its decision on the basis of positive economic indicators. "But there was that cautionary element," he said.
Canada becomes the first G-7 country to cut the interest rates. Three other G-7 countries — Germany, Italy, France, all part of the Euro-currency zone — are also likely to see lower interest rates with the European Central Bank based in Frankfurt poised to cut rates Thursday.
But Ottawa is closer to Washington, D.C. than Frankfurt and Lee said the Bank of Canada needs to be mindful of policy decisions in the United States, Canada’s closest trading partner.
Experts are expecting that the U.S. Federal Reserve won’t cut interest rates until September. Too big of gap between Canadian and American interest rates could hurt the Canadian dollar (and with it exports), Lee said.
However, Lee expects the cut will have a positive psychological effect on economic and political behaviour. Incumbent governments in both Victoria and Ottawa will “likely” benefit, he said.
“So the B.C. NDP with an election coming up this October could get a little bit of a bump from this,” he said.
Premier David Eby Wednesday (June 5) welcomed what he later called an “overdue” decision but also used the occasion to criticize the bank.
“The biggest driver of inflation in B.C. is housing costs,” Eby said. “The decision by the Bank of Canada to so radically increase interest rates in our country had a very specific impact in British Columbia. It made it way more expensive to build rental housing, something we need to do at scale given our population growth here.”
Interest rates also impacted mortgage holders and businesses, he added.
“I’m glad that it appears we are at the top of the cycle,” he said. “The deliberate decision to stall out and hurt the economy to drive down costs…hurts families and small businesses and that’s where we will focus our support.”