a swift shift to the neutral zone The Bank of Canada used its final meeting of 2024 to implement another 50-basis-point cut. While uncertainty on the direction of the economy and inflation has increased recently, lower interest rates have already changed the trajectory of home sales this fall.
Donald Trump won’t officially be sworn into office until late January, but he has already been busy filling blank space about his plans for the next four years. His hawkish reputation on international trade (which we know all too well from the renegotiation of NAFTA in his first term) has been on display recently with his announced plans to slap a 25% tariff on all imports from Canada and Mexico. The story of us (Canada) and the United States is one of deep economic integration and trade, and blanket tariffs would be devastating for our economy. In 2023, Canada exported $595 billion worth of goods and services to our southern neighbour, equivalent to 77% of our total exports. Back to December and the Bank of Canada’s latest interest rate decision, there was little mention of the tariff threat, citing only that it has “increased uncertainty and clouded the economic outlook.” What we do know for certain is that housing market activity has already taken a different trajectory in response to earlier interest rate cuts ( see this brief article highlighting how sales activity in Vancouver, Victoria, and Kelowna has improved this fall). The latest 50-basis-point cut is likely to breathe even more life into a market that has endured more than two years of sluggish activity.
On December 11th, the Bank of Canada used its final interest rate decision of 2024 to implement yet another larger-than-usual 50-basis-point interest rate cut . At 3.25%, the policy rate is right on the edge of the Bank’s theoretical “neutral range” of 2.25- 3.25%, where interest rates neither stimulate nor restrict economic activity. Since June, the policy rate has been on a swift decline. That’s when the Bank began to walk it back from a more than two-decade high of 5.00%, cutting a cumulative 175 basis points over five consecutive meetings. Long story short, the justification for such significant easing of monetary policy is that the Canadian economy is weak and inflation is under control. While annualized GDP growth was positive in Q3 at 1.0%, on a per-capita basis, the economy has been in the red for quite some time. Per-capita GDP has contracted for six consecutive quarters and in eight of the last nine. The situation in
Canada’s labour market has also been delicate. Though the country added 50,000 jobs in November, all of them were in the public sector, and that was not enough to absorb continued growth in the labour force from robust population growth. As a result, the unemployment rate climbed higher to 6.8%, the continuation of a more than two-year trend of deterioration. The good news is that inflation is back where the Bank wants it to be. Though the headline rate climbed to 2.0% in October from a more than three-year low of 1.6% in September, this was still right on target for the Bank. And when removing shelter or mortgage interest costs from the calculation, price growth was actually trending pretty firmly below that. But while the Bank of Canada (and Canadians) may be eager to call end game on this latest era of high inflation, new uncertainties have arisen as a result of the more isolationist style of the incoming administration down south.
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