The Bank of Canada took a significant step this week by maintaining its benchmark interest rate at 5%. Considering that the bank has been gradually raising rates since early 2022 in an effort to reduce inflation, this action was not surprising. The current rate was set in July as a result of these hikes, and it hasn't changed since. This stability is a reaction to indications that the Canadian economy is slowing down, which is consequently reducing the pressure on inflation.
The rate set by the bank is crucial since it influences rates on some Canadian savings accounts as well as variable-rate loans. Numerous indicators point to the recent economic slowdown: consumer expenditure is declining, household borrowing has significantly decreased, and inflation has slowed to 3.1%. Discussions about a possible recession are being sparked by these developments, which are having a considerable impact on the economy as evidenced by the recent decrease in GDP.
Because of a five-quarter run of declining real GDP per capita, many Canadians are feeling the financial impact of these events. Due to the pressure on the economy, more Canadians are choosing fixed-rate mortgages over variable-rate ones and placing a higher priority on paying off their debt. This shift is also seen in bank reports, which indicate a decline in some mortgage product categories.
The current state of the economy has resulted in the weakest expansion of consumer credit in thirty years, and household credit has actually decreased when inflation is taken into account. This signifies the start of a deleveraging period and the potential for a recession in the family balance sheet, should interest rates continue to rise.
Economists believe that the Bank of Canada will likely begin lowering interest rates in the upcoming year, with notable reductions expected by the end of 2024. Based on a survey of 26 economists, the outlook shows that rate decreases are expected on average. This change in monetary policy might have a significant impact on both the real estate market and the Canadian economy.