Experts welcome today害羞草研究所檚 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.
害羞草研究所淔inancing costs are a really huge barrier right now and害羞草研究所 lot of projects have been put on the sidelines, if not, cancelled outright due to financing costs,害羞草研究所� he said. 害羞草研究所淪o this will definitely help at a time when we have all recognized the need for increased housing supply given the overall situation.害羞草研究所�
Brendon Ogmundson, chief economist with the British Columbia Real Estate Association, predicts the cut will have a positive effect on the demand side. 害羞草研究所淲e 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,害羞草研究所� Ogmundson said.
But all three caution against undue expectations. Lee said the cut will mostly impact individuals on variable mortgage rates.
害羞草研究所淪o those are folks who have had unpleasant surprises during the whole interest rate tightening cycle,害羞草研究所� Lee said. 害羞草研究所淭hose folks should see fairly immediate relief on their mortgages.害羞草研究所� Mortgages rates tend to follow the policy interest rate. 害羞草研究所淲hat害羞草研究所檚 bad, it害羞草研究所檚 only 25 basis points, so I don害羞草研究所檛 think you are going to see a huge difference, but at that point, every bit counts.害羞草研究所�
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Ogmundson added the impact on fixed mortgage rates might 害羞草研究所渘ot be that significant害羞草研究所� noting markets have already been anticipating falling rates.
害羞草研究所淎s a result, (five)-year fixed mortgage rates have likely already priced in the entirety of expected rate cuts,害羞草研究所� 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 害羞草研究所� Germany, Italy, France, all part of the Euro-currency zone 害羞草研究所� 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害羞草研究所檚 closest trading partner.
Experts are expecting that the U.S. Federal Reserve won害羞草研究所檛 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 害羞草研究所渓ikely害羞草研究所� benefit, he said.
害羞草研究所淪o the B.C. NDP with an election coming up this October could get a little bit of a bump from this,害羞草研究所� he said.
Premier David Eby Wednesday (June 5) welcomed what he later called an 害羞草研究所渙verdue害羞草研究所� decision but also used the occasion to criticize the bank.
害羞草研究所淭he biggest driver of inflation in B.C. is housing costs,害羞草研究所� Eby said. 害羞草研究所淭he 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.害羞草研究所�
Interest rates also impacted mortgage holders and businesses, he added.
害羞草研究所淚害羞草研究所檓 glad that it appears we are at the top of the cycle,害羞草研究所� he said. 害羞草研究所淭he deliberate decision to stall out and hurt the economy to drive down costs害羞草研究所urts families and small businesses and that害羞草研究所檚 where we will focus our support.害羞草研究所�
