Rate cut outlook softens due to housing resilience

A new report from TD Economics suggests that while Canada’s economy continues to slow, the Bank of Canada’s rate-cutting cycle may not be as aggressive as previously expected, largely due to a surprisingly resilient housing market.

The report offers a quarterly review of economic conditions, focusing on Canada’s response to global trade barriers and domestic policy shifts.

The banking giant cast doubt on the likelihood of multiple rate cuts, noting that the policy rate is already within the central bank’s neutral range. “Never say never,” it stated, while adding that “cooler economic growth will turn down the temperature on Canadian inflation,” giving the Bank of Canada room to lower rates later this year.

Still, it cautioned that “it would be unusual for the central bank to apply a one-and-done approach,” framing the decision as a choice between “zero or two cuts” in 2025. This outlook is reinforced by a housing market that is already showing “modest stimulus” from earlier rate moves.

On July 30, the Bank of Canada held its key interest rate at 2.75%, marking a third consecutive pause following a series of cuts that began in late 2024. While the central bank emphasized it will continue monitoring the effects of global trade disruptions, many analysts now expect a potential rate cut in September, a view shared by market traders.

According to the report, recent gains in Canada’s housing market are not temporary. Home sales have risen for four straight months, and average prices are up 5% over the same period. The rebound, it argued, was “delayed by a few months under the weight of US tariff upheaval” and is projected to continue into next year. Although affordability challenges persist, the report forecasts that a “robust recovery is unlikely until next year, when a 2% drop in Canadian sales and relatively flat Canadian average home prices… flips into sales growth of 9% and price growth of around 5%.”

The Canadian Real Estate Association (CREA) has observed similar trends. In July, the group reported that despite lowering its annual sales forecast, the market appears to be entering its “long-expected recovery phase.”

With housing seen as a central factor in monetary policy decisions, the report concludes that the interest rate channel is already “working at stimulating demand” in the sector. As a result, the need for further, substantial cuts is less compelling. Future policy moves will hinge on whether inflation proves more persistent than expected.

Source CMP
By Jonalyn Cueto