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The Bank of Canada will make its next key interest rate announcement on Wednesday, and researchers at Capital Economics expect the central bank to keep the rate right where it is — only for the time being, though.

“The apparent rebound in third-quarter GDP and the surge in employment in September will provide some comfort that the economy is on the right track,” says Paul Ashworth, Capital Economics’ chief economist for North America.

Next year, it will be a very different story, he suggests in a recent report. The cause?

“We still think that a housing downturn will hit economic growth next year and ultimately force the bank to cut its policy rate,” Ashworth continues.

Capital Economics predicts this potential real estate slump in 2017 will encourage the Bank of canada to trim the key interest rate to 0.25 per cent, down from its current rate of 0.5 per cent.

The key interest rate, or overnight rate as it is sometimes called, is the bank’s target for the rate at which banks will borrow funds from one another from day to day. It influences mortgage rates, and therefore has an impact on the housing market.

In 2015, amid free-falling oil prices, the Bank of Canada trimmed the overnight rate by 25 basis points twice.

Now, Capital Economics draws attention to how home sales, a bright spot for a sluggish economy, have already slowed down in Vancouver, which until recently was the country’s hottest housing market.

Toronto has since taken Vancouver’s place, with house prices climbing by nearly 10 per cent in the past four months, the economic research firm notes.

Last month, Toronto homes, including condos, sold for an average price of $755,755, representing an increase of 20.4 per cent from the previous year, according to the Toronto Real Estate Board.

“When the boom inevitably goes into reverse… the bank will need to provide more support by cutting interest rates,” Ashworth explains, but for the moment, central bank policymakers’ hands are tied.

“There is little the bank can do to counter the bubble, however, since a rate hike would devastate the rest of the economy,” says Ashworth.

Today, the first in a series of recently announced mortgage and tax policy changes meant to cool the Canadian housing market took effect.

As a result, all new insured mortgages with downpayments of less than 20 per cent will need to undergo stress testing to ensure homebuyers aren’t in over their heads.

“All the bank can do is hope that the newly announced tightening of mortgage rules by the Liberal government has the desired cooling effect,” says Ashworth.

“Unfortunately, at this stage the chances of a soft landing for housing are pretty remote,” he adds.

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