Why Canada may need deeper interest rate cuts than other countries.
Why Canada May Need Deeper Interest Rate Cuts Than Other Major Economies
Canada is facing significant housing affordability challenges, which may require more substantial interest rate cuts from the Bank of Canada than other major economies. Here’s a concise breakdown:
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Housing Affordability Crisis:
- Current mortgage rates are easing, but home prices have fallen further, improving affordability slightly early in 2024.
- Experts caution that meaningful relief won’t arrive until policy rates are reduced.
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Historical Context:
- Over the past four decades, Canada’s housing market has experienced two significant affordability crises: one in 1981 and another speculative bubble in 1989.
- Post-peak home price increases are typically followed by periods of relative calm, indicating potential for improvement but not relief.
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Expert Projections:
- BMO Economics senior economist Sal Guatieri projects that Canada may experience some affordability improvement early this year due to rate adjustments and falling prices.
- Toronto Dominion Bank forecasts policy rates could drop to 2.25% by late 2025, indicating a potential pathway for deeper cuts.
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Economic Implications:
- The risk of the BoC waiting too long exists; timely rate reductions are crucial to avoid prolonged economic stress.
- Experts emphasize the importance of proactive measures, such as supporting first-time buyers and ensuring housing affordability.
In conclusion, Canada’s unique housing market dynamics suggest that deeper interest rate cuts may be necessary to alleviate affordability pressures. Timely policy adjustments are critical to support economic stability and growth.
