Rate Cut Expectations Grow as Canadian Inflation Falls to 2.5%

Canada's inflation rate continued to slow down in July, reaching its lowest level in three years. This decline will likely prompt the central bank to cut interest rates for the third time in a row at its upcoming meeting on September 4th. Similarly, the US is anticipated to start easing its monetary policy at its September meeting.

Canada's annual inflation rate dropped 2.5% in July from 2.7% in June, matching market expectations. The decline was driven by lower prices in travel tours, passenger vehicles, and electricity. This is consistent with the Bank of Canada's outlook, which predicts a slowdown in inflation to 2.5% by the second half of 2024.

July's inflation reading provides a promising signal for the Bank of Canada, creating an opportunity for a potential rate cut at this week's meeting. For the seventh consecutive month, July's headline inflation rate stays within the Bank of Canada's target zone, with the annual pace of price growth slowing to its lowest point in over two years.

Despite falling interest rates, the Canadian housing market experienced a mid-summer slump last July. National home sales dropped 0.7% monthly in July, according to data from the Canadian Real Estate Association (CREA).

July saw a slight decrease in national home sales, coupled with a modest increase in new listings. The sales-to-new listings ratio dipped to 52.7% from June's 53.5%. This ratio remains within the balanced market range, hovering close to the 55% long-term average.

A housing market rebound is anticipated, despite muted July data, according to James Mabey, Chair of CREA. James Mabey also noted that buyers are currently enjoying a wider range of options in many markets than in recent years, but this period of relaxed house hunting may be drawing to a close.

As interest rates continue to decline, the housing market is expected to gain momentum over the next year. Many potential buyers are waiting for further rate cuts, anticipated throughout 2024 and into 2025, before entering the market. According to Chief Economist, Dr. Sherry Cooper, the Bank of Canada is projected to lower the overnight rate from 4.5% to around 2.75% by next year. Although affordability remains a concern, pent-up demand is building, and construction activity is thriving. Dr. Sherry Cooper expects a renewed interest in homebuying early this fall. The Bank of Canada will meet again on September 4th for the next interest rate announcement. Stay tuned for more updates!