The extreme volatility experienced in global financial markets over the past week is having an immediate impact on Canadian interest rate forecasts—they’re falling like autumn leaves in a gusty wind.

TD, CIBC and BMO have led the way with their revised forecasts, with all now expecting the Bank of Canada to cut interest rates faster and deeper over the next 16 months.

Just a couple of weeks ago we reported on CIBC and TD’s interest rate forecasts, which predicted an additional 175 basis points (1.75 percentage points) worth of Bank of Canada rate cuts by the end of 2025.

Well, both banks have updated those forecasts and are now predicting 200 bps (two percentage points) worth of easing by the end of 2025. This would bring the overnight target rate down to 2.50%, a level last seen in the fall of 2022.

Updated forecasts from RBC, NBC and Scotia in light of last week’s market volatility have not yet been released but are expected to include downward revisions to the Bank of Canada’s overnight target rate.

The consumer price index rose 2.8% last month from a year ago, following a 2.9% increase in January, Statistics Canada reported Tuesday in Ottawa. That’s the slowest pace since June and below the median estimate of 3.1% in a Bloomberg survey of economists.

Traders boosted their bets on a June rate cut, pricing in around a three-quarters chance of one. The odds were about 50/50 on Monday.

The Canadian dollar weakened and bonds surged, pushing the yield on two-year Canadian government debt to 4.16%, down about 14 basis points on the day. That’s the biggest intraday drop since Feb. 20.

On a monthly basis, the CPI climbed 0.3%, versus expectations for a 0.6% increase, and rose 0.1% on a seasonally adjusted basis.

The Bank of Canada’s two preferred core inflation measures also slowed, averaging a 3.15% yearly pace from 3.35% a month earlier, slower than the 3.35% expected. A three-month moving average of the rate fell to an annualized pace of 2.23%, from 3.12% in January. Other key core measures also showed disinflation.

The new data bolsters the case for policymakers to soon take their foot off the monetary brake. Bank of Canada officials have said they’re waiting for enough data to convince them that inflation is on a sustained march to the 2% inflation target before they begin cutting interest rates.

This is the only inflation report before the next rate decision on April 10, when the central bank will also update its economic projections. Economists widely expect the bank to hold policy rates at 5% for a sixth straight meeting, with the easing cycle to begin around midyear.

Toronto agents say first-time buyers are flooding into open houses and dominating offer nights, which is something they haven’t seen happen since the Bank of Canada began to turn up the heat on interest rates.

If the past few months have taught us anything, it’s that Toronto’s housing market doesn’t stay downcast for long. Sales activity began to ramp up in the latter few months of last year, and as of last month, transactions were up a hair shy of 18% on a year-over-year basis.

“Things have definitely picked up, but what’s interesting is the segment of the market that’s picked up, and that’s kind of the under $1.5M price point,” says Toronto realtor Lisa Bednarski. “And I’m talking more about Toronto than the broader GTA, but that tends to be first-time buyers.”

Bednarski, who is an agent with the BREL team, tells STOREYS that first-time buyers are flooding into open houses and dominating offer nights, which is something she hasn’t seen happen since the Bank of Canada began to turn up the heat on interest rates in the middle of 2022.

She recently had a listing on Symington Avenue, which she priced at a million dollars. It got some 6,000 views on Realtor.ca (which Bednarski notes is “off the charts”) and had over 100 showings. Ninety-three people attended the open house.

“All were first-time buyers. And we got 23 offers on offer night,” she says. “Buyers are gambling that interest rates are going to go down in the summer, which is not a bad gamble. So they want to, you know, date the rate and marry the house.”

The average asking rent price in Canada hit $2,193 in February, marking a 21% increase compared to February 2022 — just before the Bank of Canada began its rate hike cycle.

In the last year alone, rent prices grew 10.5% across Canada, which represents the fastest annual growth since September 2023, says a new report from Rentals.ca and Urbanation.

“The rapid rate of rent growth in Canada is unrelenting,” said Shaun Hildebrand, President of Urbanation. “While some markets are experiencing a softening in rents, others are seeing an acceleration, with an underlying theme that rental supply remains grossly insufficient to meet current levels of demand.”

The increase was led by a 14.4% annual jump in purpose-built rental apartments, which hit an average asking price of $2,110 in February. Condo apartments, on the other hand, saw a 5% year-over-year increase in asking rents, reaching $2,372.

Canada’s priciest provinces — Ontario and British Columbia — saw the slowest growth in asking rents for both purpose-built rental and condo rental apartments over the past year, with increases of 1% and 1.3%, respectively. The most expensive cities within those provinces — Toronto and Vancouver — however, actually saw their average asking rents decline in February, falling 1.3% and 3.3%, respectively.

Monetary Policy Report – January 2024

Interest rates are working to moderate spending and inflation is easing gradually, though underlying pressures are proving persistent.

The Bank projects that inflation will stay around 3% through the first half of 2024, returning to target in 2025.

Toronto’s housing market has come alive in early 2024

A surge in home sales across Canada’s largest markets to kick off 2024 is unlikely to prompt the Bank of Canada to delay its probable interest rate cuts later this year.

The start of the year has shown signs of a rebound in some major housing markets, including in the Greater Toronto Area, where home sales soared 37 per cent in January compared with the same month a year ago.

Last month’s 4,223 home sales also marked a 22.9 per cent month-over-month increase from December, according to data released Tuesday by the Toronto Regional Real Estate Board. It credited lower borrowing costs associated with fixed-rate mortgages that lured some buyers back to the market.

Other local real estate boards have also reported year-over-year increases in home sales activity last month: Vancouver sales jumped by 38.5 per cent, Calgary, by 37.7 per cent, and Montreal, at 18 per cent.

“Clearly, the mood in the market is starting to improve,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets.

“The market is starting to internalize that interest rates have peaked.”

Tal said the main outstanding question is whether sellers will respond to renewed demand. If the housing market sees improvement in the number of new listings, this would prevent prices from rising too quickly over the next six months.

Buyers in Canada are starting to venture back into the housing market, seeking to get ahead of any possible shopping frenzy spurred by expected rate cuts from the Bank of Canada.

An unusual home sales rally in December has stoked speculation that the Canadian housing market may start to heat up even more. With prices still soft as the central bank signals that it’s done raising its benchmark rate, buyers are trying to find the best time to purchase property before more competition floods in and pushes prices back out of reach.

The psyche in the market has already started to shift. Canadians became more optimistic about home prices in November and that trend has steadily risen in the months since, according to a poll conducted for Bloomberg by Nanos Research.

It’s lured in buyers such as Maria Herrera, a 31-year-old manager at a Vancouver animation company. With the goal of snagging a two-bedroom condo, she recently jumped back into the market with her husband and agreed to buy a place in the suburbs in January after spending the past few years weighing a home purchase.

“I don’t think we’re the only ones who have saved for a down payment in the last three years,” Herrera said. “It will go back to people getting excited with the rates getting lower, and people just going a little crazy and going into a buying frenzy.”

Anticipating a Seller’s Market Surge: Renewed Mortgages, Rising Prices, and New Home Activity Expected to Boost Listings and Drive Price Growth in 2024. While supply levels gradually improve, persistent demand may prolong market tightness, particularly for lower-priced properties

Addressing the media following yesterday’s rate announcement, BoC Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers expressed that home prices have not responded to rate hikes in the anticipated or desired way.

As anticipated, the Bank of Canada (BoC) opted to hold its policy rate steady at 5% on Wednesday. In a statement, the bank cited “growing evidence that past interest rate increases are dampening economic activity,” including with respect to housing, where demand has softened considerably.

Even so, in addressing the media following yesterday’s rate announcement, BoC Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers expressed that home prices have not responded to rate hikes in the anticipated or desired way.

“Normally, house prices move pretty lockstep with interest rate increases. Most Canadians buy houses with credit, so they’re one of the first things that respond to monetary policy,” said Rogers.

And while prices have indeed come down over the course of the hike cycle — the not-seasonally-adjusted, national average price has slipped from $796,000 in March 2022 to $655,507 last month — many month-over-month declines have been nominal. There were also a number of months where prices managed to rally and offset declines.

“Relative to the degree of rate increases, we’re not seeing the decline in house prices that we would expect,” continued Rogers.

“There is a structural lack of supply in the Canadian housing market. So, really, until we address that supply issue, interest rates on their own are not going to help us get back to a housing affordability situation.”

BoC staff also spoke to mortgage realities confronting Canadians on Wednesday, saying that the bank is “paying really close attention to the mortgage renewal cycle.”

“Basically it’s monetary policy at work. As more households renew their mortgage at a higher rate, it puts downward pressure on spending. They have less money available to spend on other things, that dampens demand, that sort of gets the economy back in balance,” said Rogers.

“We are watching for the financial pressure that comes with that. We usually talk about that more in our Financial System Review — we’ve got an update to that coming in November and you’ll hear more from us on that at that point.”