‘Canadians can breathe a sigh of relief,’ Macklem says, as Bank of Canada cuts interest rate by 50 basis points #CanadaFinance

Canada’s biggest banks reduced their prime rates Wednesday afternoon after the Bank of Canada cut interest rates for the fourth consecutive time.

RBC, BMO, TD, Scotiabank and CIBC each lowered their prime rates by 50 basis points, from 6.45 per cent to 5.95 per cent. The new rates are effective Oct. 24.

The prime rate is the annual interest rate that banks and financial institutions use to set interest rates for variable-rate mortgages, lines of credit, and some other loans.

RBC Royal Bank announced a decrease to its prime rate by 50 basis points following the Bank of Canada’s rate cut, bringing it to 5.95 per cent from 6.45 per cent. The new rate is effective Oct. 24.

The other major banks are expected to follow suit.

The market generally saw today’s jumbo cut coming, Paul Shelestowsky, an investment advisor at Meridian, wrote in a statement, “which should help smooth out and ensure relatively positive market reactions for investors.”

The announcement suggests inflation has been curbed, Shelestowsky says, but Canada’s still-sluggish economy means the cut’s impact may not be substantial.

“Hopefully, it translates into more discretionary income for borrowers and, although it creates less incentive for savers to save, both outcomes are good for the economy, which thrives when people have the confidence and means to spend money.”

The Bank of Canada left the door open for an additional jumbo-sized rate cut, Scotiabank vice president and head of capital markets economics Derek Holt wrote in a research report.

“If the BoC wanted to say this was an unusual one-and-done upsizing, then they could have easily done so,” Holt wrote.

“The fact they did not, and chose instead to leave the door open, was a dovish signal that sets a low bar for data to guide another large cut.”

Holt also criticized the BoC’s track record in this cycle on forecasting inflation. Pointing to the Bank’s inflation expectations from past MPR’s, Holt wrote, “They miss the turning points, undershoot, overshoot, and sound too confident in their projections every step of the way.”

“So, when the BoC sounds confident about hitting 2 per cent inflation sustainably in its forecasts, it’s best to ignore,” Holt added.

Holt noted that there is plenty of data for the Bank to consider between now and the Dec. 11 decision, including GDP figures for August and September, October GDP guidance, two jobs reports, and one Consumer Price Index report.

In a statement, Josh Grundleger, a director at Fitch Ratings, writes that further BoC cuts are “all but ensured” and that the question will be around the pace of those cuts.

He cites anemic growth figures, stagnant spending and weak labour conditions, writing that the BoC is “clearly concerned … these trends will drive inflation structurally below its 2 per cent target.”

However, he says, “the Bank will have to thread the needle between boosting consumer demand, which remains sluggish, and unleashing too strong of a rebound in the housing sector, where structural supply constraints remain.”

The S&P/TSX Composite index (^GSPTSE) traded slightly lower on Wednesday, following the Bank of Canada’s decision to cut its policy rate by a widely predicted 50 basis points.

The metals and energy components were the largest laggards, while shares in health care and industrial firms inched into positive territory.

Axis Auto Finance (AXIS.TO), Amerigo Resources (ARG.TO), and New Gold (NGD.TO) were the largest decliners at 12:48 p.m. ET. Meanwhile, shares of McCoy Global (MCB.TO), Dye & Durham (DND.TO), and Steppe Gold (STGO.TO) booked the biggest gains.

The Loonie (CADUSD=X) dipped slightly in the wake of the central bank’s decision, trading at US$0.7224.

The BoC cut’s potential upside in real estate isn’t restricted to the residential sector. In an email, Mark Fieder, principal and president of Avison Young Canada, writes that today’s cut “is most welcome news to the commercial real estate industry and will have a positive impact on investor sentiment, fuelling appetite and capital allocation.”

This cut should help build enthusiasm for investing “from institutional investors in particular,” Fieder says.

“With commercial real estate return metrics improving compared to other asset classes, we’ll keep a watchful eye on performance now that we are shifting into a new interest rate regime that is better favouring investment opportunities.”

A note from economists at National Bank of Canada Financial Markets describes the BoC’s macroeconomic forecasts as “very optimistic.”

Economists, Taylor Schleich, Warren Lovely and Jocelyn Paquet, write that “we feel we’re in for a repeat of the past three months, where growth continues to undershoot the BoC’s optimistic expectations.”

With that in mind, another 50 basis point cut in December “should be viewed as the overwhelmingly likely outcome,” the note says. National Bank sees the BoC rate “bottoming at 2.0 per cent” in the third quarter of 2025, Schleich confirmed in an email.

While Desjardins economists noted that the Bank of Canada “decided to go big as opposed to going home in its October 2024 rate announcement”, they expect the central bank to take a more modest path going forward.

Desjardins’ senior director of Canadian economics Randall Bartlett and economic analyst LJ Valencia wrote in a note on Wednesday that they expect the central bank to cut by 25 basis points at its next decision in December, and six more times at the same rate in 2025.

“Looking ahead, we haven’t seen the end of rate cuts,” they wrote.

“Sticking the landing will require incentivizing households to spend again as opposed to saving.”

Bank of Canada governor Tiff Macklem says a pick-up in the housing market could “happen faster” and “be bigger than we are expecting” as he outlined potential risks related to lower interest rates.

Macklem and senior deputy governor Carolyn Rogers said while the Bank has included accelerated housing activity in their latest forecast, they will closely monitor this rate-sensitive category.

“It is possible that the combination of lower interest rates and changes in mortgage rules could mean that [pick-up] happens sooner or faster or stronger than we expect,” Rogers told reporters on Wednesday.

“It’s also possible people will look at the direction of interest rates and sort of stay on the sidelines a bit longer, and wait for rates to come down more, and we don’t see that pick-up happen as fast or as strong as we’re anticipating.”

RBC is maintaining its forecast for a second 50 bp cut in December, writes economist Claire Fan, with following cuts at a smaller scale.

RBC’s macroeconomic forecasts are weaker than the BoC’s, Fan says. “We think real GDP growth is more likely to stay subdued for longer in Canada as interest rates remain restrictive until 2025.” RBC thinks 2025 GDP growth will be 1.3 per cent, well below the BoC’s 2.1 per cent forecast, and unemployment will rise to seven per cent.

As such RBC sees the overnight rate hitting 2 per cent by July, “stimulative and a touch below the lower bound of the BoC’s own estimates of neutral rate at 2.25 per cent – 3.25 per cent.”

While Bank of Canada governor Tiff Macklem says Canada is “back to low inflation,” recent surveys reflect ongoing frustration over high grocery and shelter costs.

Asked if today’s fourth-consecutive rate cut will make a difference to average Canadians, Macklem told reporters, “It’s been a long road back from the high inflation we experienced coming out of the pandemic.”

“I think Canadians can breath a sigh of relief,” he added. “With inflation staying close to two per cent, Canadians don’t have to worry about big changes in their cost of living.”

Senior deputy governor Carolyn Rogers added, “I think what Canadians feel is life’s more expensive now than it was two years ago … it’s really a good news story that inflation has come back. It means that prices aren’t going to keep going up.”

Reading between the lines of the BoC’s language, BMO chief economist Douglas Porter sees an “underlying message … that there’s little urgency to follow up with another large move.”

The BoC seems less worried about guarding against inflation being too low, Porter says, and more confident that its cuts to date will translate to improving economic growth.

“Today’s outsized rate cut is mostly a response to the heavy-duty decline in headline inflation in the past few months,” Porter wrotes. “However, the underlying forecast and the Bank’s mild tone suggest that the future default moves will be 25 bp steps, unless growth and/or inflation surprise again to the downside.”

BMO expects five more cuts of 25 bps, with the overnight rate at 2.5 per cent “by next June,” Porter says.

The Bank of Canada’s 50 basis point rate cut today is unlikely to be a “one-off”, according to Capital Economics deputy chief North America economist.

Stephen Brown predicts a similar-sized move in December, noting the Bank’s apparent lack of confidence in strong growth on the immediate horizon.

“With little sign that economic growth is accelerating fast enough to close the output gap, and assuming further encouraging CPI data releases, we continue to expect another 50 bp cut from the Bank in December,” he wrote.

Karl Schamotta, chief market strategist at Toronto-based payments firm Corplay, says today’s announcement raises the odds of bigger cuts this year.

“Odds of another jumbo-sized move at the Bank’s December meeting are slightly higher relative to pre-release levels,” he wrote to his newsletter subscribers.

In a statement sent to Yahoo Finance Canada, Phil Mesman, a portfolio manager and the co-head of fixed income at Picton Mahoney Asset Management, calls today’s BoC move “an insurance cut.” The BoC “sees low inflation and wants stronger growth and they’re getting ahead of it,” he writes.

The market “allowed” the Bank to make the larger cut, Mesman says, and post-announcement bond market reaction has been “muted” and the loonie “only modestly weaker.”

Another 50 bp cut in December is in play if data align with BoC forecasts, he says, with “no reason to reduce to 25 bps unless data come in hot.” Mesman adds that market odds for a 50 bp cut in December are currently even, “which seems light in our view.”

The BoC has “gained confidence” that it can make cuts more quickly now that headline inflation is down, writes TD senior economist James Orlando.

Today’s 50 bp cut alone is unlikely to boost economic growth, Orlando writes, “but the central bank felt it should do something with economic data continuing to show that the country is stuck in a rut.”

More cuts should very much be expected, Orlando says, though the exact rollout is unclear. “Even with the succession of policy cuts since June, rates are still way too high given the state of the economy,” he writes.

TD currently expects another 150 bps of cuts by the end of next year.

Adrian Rocca, CEO of rental property developer Fitzrovia, previously warned that the first three BoC cuts weren’t enough to help with Canada’s housing problems. He greeted today’s cut with much more enthusiasm.

“The Bank of Canada’s 50 basis point rate cut is the action we need to see — a crucial piece of the puzzle in addressing Canada’s housing crisis,” he said in a statement sent to Yahoo Finance Canada.

There is a “but.” Rocca says innovation around both building and financing is essential for strengthening the economy and reversing the trend in housing starts. “To get smarter, faster, and build investor confidence in Canadian real estate, we must innovate and adopt new technologies that help to improve precision, cut costs, and speed up delivery.”

Governments need to offer tax abatements, cut development charges, and provide funding to encourage more innovation, Rocca says.

“We can’t keep taking the same approach we’ve used for the last 30 years and expect to meet the demand of the next 30.”

The Bank of Canada’s fourth consecutive rate cut this year is expected to add heat to the housing market, according to multiple industry observers.

“It’s likely that we will now see an uptick in pre-approvals as buyers prepare to move quickly once they sense the tide is turning,” RATESDOTCA mortgage and real estate expert Victor Tran stated in a news release following today’s announcement.

“We may see this psychological shift in the coming weeks . . . once the market begins to move, it’s likely to heat up quickly, pushing home prices higher. This may lead to an unseasonably busy winter season, and a busy spring season in 2025,” he added.

Phil Soper, president and CEO of Royal LePage, sees a revival from sluggish activity in certain regions caused by higher borrowing costs. However, he warns higher prices may offset this advantage.

“With every cut to the overnight lending rate, more homebuyers are expected to come off the sidelines,” he said. “In turn, rising demand will cause home prices to increase more rapidly, eliminating the advantages of lower borrowing costs.”

Mortgage expert Leah Zlatkin advises those looking to enter the real estate market to move quickly to avoid rising prices.

“Potential buyers should consider buying now if they can and take a higher rate for a shorter-term length to get into the market,” she said. “Buyers who choose to purchase now will have more choices and less pressure than they would in a hot market.”

CIBC chief economist Avery Shenfeld, who had seen a possibility of a 75-basis-point cut today, called the still-significant 50 bp cut “a no brainer” in a note this morning and said the BoC’s statement “plants a victory flag in the battle against inflation.”

“Based on the logic offered to justify today’s decision, it would take a significant turn of events to stand in the way of another cut of that magnitude in December,” Shenfeld wrote, while noting that the BoC’s language “keeps its options open by not signalling anything specific about the size of individual rate cuts ahead.”

Nothing about today’s announcements should surprise the markets, Shenfeld says, with today’s cut “nearly fully priced in ahead of time.”

While the Bank of Canada noted in its monetary policy report on Wednesday that lower interest rates may help increase the supply of housing by easing financing costs, there remain obstacles, such as zoning restrictions and a lack of skilled labour, that will limit the pace of construction.

“As a result, growth in housing demand is expected to outpace increases in supply,” the central bank said in its report.

“Unlike other sectors of the economy that are experiencing excess supply, the housing market is projected to remain tight. House prices are expected to rise, but the pace of increases will likely be restrained because some home buyers will face affordability challenges.”