As widely expected, the Bank of Canada (BoC) left interest rates alone today keeping the policy rate unchanged at 4.50%. Because the rate hold was anticipated, Vincent Lépine, Vice President, Economy and Capital Markets at CIBC Asset Management, says “today’s rate announcement doesn’t qualify as a market moving event.”

How interest rates affect the Canadian housing market

One of the reasons the BoC held interest rates is related to the Canadian housing market recession already underway. Canadian housing activity has deeply declined with existing home sales down 42% from their 2021 peaks and down 16% from pre-pandemic levels.

Another concern for the BoC and Canadian monetary policymakers relates to the decline in housing affordability. The price of homes has slowly been correcting over the last year, with the average home price down approximately 19%. But there is still more work to do if policymakers want to help make buying a home and the cost of living expense more affordable. Mr. Lépine confirms, “the share of disposable income that households are putting toward housing-related expenses has increased from roughly 32% in 2020 to 50% in early 2023.”

The last time that Canadian households had to cope with a shock of this magnitude was just before the recession in the early 1990s (March 1990 to April 1992). As for most recessions, the economic downturn during this time was led by the housing market—what started as a housing market recession rapidly turned into a full-blown economic recession. In an effort to avoid repeating history, the BoC decided to keep the policy rate unchanged today.

Will Canadians see another rate increase soon?

The BoC needs more time to evaluate the impact of high inflation and the previous rapid increase of interest rates to the Canadian economy, and the progress made on curbing inflation before they can make additional rate decisions.

According to CIBC Capital Markets, patience should indeed be a virtue when working towards getting inflation back to its target rate of 2%. Although rates did not move today, the BoC reminded Canadians that it may still increase rates again this year if the economy fails to slow enough to sufficiently quell price and wage pressures.

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