The Bank of Canada announced on Wednesday that it will lower its key interest rate by 25 basis points. While inflation is still higher than most central bank targets globally, many inflationary pressures continue to ease.
Bank of Canada’s (BoC) rationale points to consistent measures of core inflation being been below 3% for several months, and signs of cooling in the US economy when looking at inflation and the latest data on consumption.
Canadian Economic Snapshot
Although core inflationary measures are easing, economic growth across Canada remains weak compared to population growth. The BoC is forecasting stronger growth figures for the latter half of the year to achieve a modest +1.2% GDP growth for 2024. This figure is expected to improve to 2.1% in 2025 and 2.4% in 2026. As borrowing costs ease, household spending may increase, and population growth is expected to slow with recently introduced limitations on new arrivals of temporary residents. The optimistic scenario is that the current excess supply in the economy will be absorbed, and the Bank anticipates core inflation to hit 2.5% in the last half of 2024.
Contrasting Forces
Key factors that may trend inflation upwards are primarily shelter costs and service prices which remain higher than historical averages. Geopolitical developments beyond Canada’s borders could also influence local inflation if supply chains are impacted.
Downside trends that could soften inflation include weaker household spending and moderating global activity. Many Canadian households have curbed spending as debt-servicing costs and prices for goods grow. It is anticipated that growth in the US will slow, and European markets will follow a similar trend of modest growth.
The Impact on Construction
With the easing of interest rates, the lower cost of borrowing should help entice investors in Canada. Energy prices are also trending downward, and material pricing volatility appears to be improving. However, demand for housing continues to grow and a shortage of skilled construction workers, higher wage growth, and regulatory costs continue to be a challenge for developers. In addition, while the exchange rate currently hovers around the $0.73 CAD to $1 USD ratio, continued divergence from the US Federal Reserve interest rate may impact Canada’s export market and material pricing.
With three scheduled rate announcements remaining for 2024, there is a potential for at least 1 or 2 more reductions, especially if the US Federal Reserve initiates rate cuts as early as next week.
.
