The cut also likely means further activity in Calgary’s busy housing and rental markets as demand continues to outstrip supply
After a second consecutive interest rate cut, further drops might be in store for Albertans and Canadians later this year — but rates likely won’t bottom out at pre-pandemic levels, some economists say.
The Bank of Canada reduced its key interest rate on Wednesday by 25 basis points to 4.5 per cent, the second consecutive cut it has made. In doing so, the central bank cited “opposing forces” such as lower household spending, which would otherwise dampen Canada’s economy if not for the country’s major influx of newcomers over the past year.
The cut also likely means further activity in Calgary’s busy housing and rental markets as demand continues to outstrip supply.
“The big thing for me is not so much the effect of the cut, it’s what generated it,” said Kent Fellows, economist at the University of Calgary.
“The cut is a signal of the Bank of Canada looking at things and saying, ‘Well, the inflation part’s under control, and now we’re worried about economic growth,’ which is a big shift in their thinking.”
On the flip side, economists and business groups say the decision — which is expected to be followed by additional cuts in the fall and early winter — will see businesses ratchet up investment.
The Calgary Chamber of Commerce said it was “encouraged” by the decision. Inflation is becoming a less pressing problem for businesses, Chamber CEO and president Deborah Yedlin said in a statement; nine per cent report it as their top issue, a far cry from 2022 when a quarter of all Calgary businesses said inflation was their leading concern.
“While this is good news, the reality is economic growth has been modest in the years following the pandemic, with higher interest rates putting pressure on businesses and households. The lowering of rates will decrease debt servicing burdens and free up capital for investment and consumer spending,” Yedlin wrote in a statement.
A recent survey by the Canadian Chamber of Commerce found Alberta businesses have indicated improving expectations for the first two quarters of 2024, with particularly high expectations for investment. Sentiment on profitability, however, remains low, according to the survey.
High real estate activity likely to persist alongside expected rate cuts
The anticipation of further rate cuts before the end of the year could result in potential buyers exhibiting patience before entering the housing market, said Charles St-Arnaud, chief economist for Alberta Central — meaning a boom in the housing market could be delayed, even following the most recent rate drop.
“I think the increase in demand on the housing side might wait for later in the fall,” he said. Should the Bank of Canada reach a four-per-cent policy rate, it may then pause further cuts to reassess how the economy reacts, he added.
While increased housing activity could pick up in the coming months, so, too, could housing starts if there’s enough skilled labour available to accommodate it, said Alicia Planicic, economist at the Business Council of Alberta.
Meaghon Reid, executive director of Vibrant Communities Calgary, said the central bank’s decision is “a bit of a reason for optimism” from a poverty-reduction standpoint. Many Calgarians have grown accustomed to budgeting their lives and tolerating high amounts of debt in recent years, she said, and rate cuts help build assurance the situation is “somewhat cooling off.”
“I think that will allow people to think in the future a little bit more than they have been. Particularly if you’re low-income, you tend to really just look at today,” Reid said.
Where’s the bottom?
While there appears to be wider consensus that further rate cuts are imminent, some economists wonder: At what point will the central bank stop trimming?
“I think it’s assumed that we’re going to go back to the same interest rates that we were seeing before and I don’t think that’s necessarily the case,” Planicic said. “I think that’s something to consider both for businesses (and) households . . . what does that mean or look like?”
Between early 2009 and 2022, interest rates frequently sat between 0.25 per cent and 1.75 per cent until the bank’s dramatic shift in policy in 2022.
St-Arnaud said he, too, expects the end point will exceed rates seen in the 2010s. In April, the Bank raised its nominal neutral interest rate — the rate at which the central bank’s policy rate is neither stimulating nor holding back the economy — to between 2.25 per cent and 3.25 per cent, a 25-basis-point increase on both ends.
“I still feel that the end point for interest rates will be higher than what some people are expecting from the Bank of Canada,” St-Arnaud said. “I feel they might end between three and three and a half (per cent) — I’m still trying to figure out that one.
“In any case, let’s say they stop at three per cent, that will still be much higher than what we’ve seen in terms of policy rates in the whole 10 years pre-pandemic.”
— Files from The Canadian Press