Bank of Canada keeping a wary eye on housing market, but rate cuts will likely continue, senior deputy governor says

The Bank of Canada is keeping a wary eye on Canada’s housing market as home sales begin to surge, senior deputy governor Carolyn Rogers says, but rate cuts will continue as long as the economy progresses as expected.
In a wide-ranging exclusive interview with the Star on Wednesday, Rogers said the bank isn’t yet ready to declare victory in the war on inflation, but it is growing increasingly confident that the economy is heading in the right direction.
Now the challenge is how to cut rates without sending house prices soaring again.
“Is there a risk that we get back to an environment where there are these extrapolative expectations and a lot of pressure on the housing market? I suppose that risk is still there,” she said, “it’s one we’ll watch.”
On Oct. 23, the Bank of Canada cut its key overnight interest rate by 50 basis points — double what it had done in the previous three decisions — bringing it to 3.75 per cent.
And on Tuesday, the Bank’s summary of discussions among members of the governing council revealed that there was “strong consensus” for taking a larger step in October than a 25-basis-point reduction, following September’s surprising 1.6 per cent rate of inflation.
Rogers said that the move was supported by central bankers’ increased confidence that the economy is recovering and there is room for growth to pick up.
Real estate experts, however, caution that similar moves by the bank going forward could reignite a hot market as homebuyers already seem to be stepping off the sidelines.
Meanwhile, millions of borrowers are set to renew their fixed-rate mortgages at much higher rates in the next two years, potentially forcing a wave of distressed home sales.
But homeowners might not need to adjust their spending and saving patterns going forward more than they already have, she suggested.
“There’s some segment of mortgage holders that are saving in anticipation of their mortgage renewing, they’ll make a paydown” Rogers said, “others are adjusting their spending patterns so they’ll have room in their budget for a change in payment.”
Still, Rogers says the bank is carefully watching how Canadians adjust, despite describing the “mortgage renewal wall” as a “tail risk” to the economy in her Wednesday speech to the Economic Club of Canada in Toronto.
When communicating with Canadians, she said the bank wants to be as clear as possible without offering “false certainty.”
“We’re trying to be clear with homeowners now that we do expect interest rates will come down as long as the economy continues to evolve the way we expect,” she said.
Looking back when the focus was on aggressively hiking rates, she said “we don’t think we got everything exactly right,” adding that the bank is currently conducting a review of its pandemic response that will be published early next year.
“That’s our effort to be a learning organization, to be an accountable organization, to go back and reflect on everything we did through a period of very high uncertainty, very unusual, unprecedented conditions,” she said. “(To) reflect back on the decisions we made and how they affected Canadians.”
Asked to evaluate the bank’s performance so far, she said “I don’t think we’re ready to grade ourselves.”
“We’ve got inflation back to target but price stability is a condition, not a destination … It’s going to take a while before we feel confident and Canadians feel confident that we’re back to steady, stable prices, and they don’t have to worry about it anymore.”
“I don’t think we’re done yet.”