TORONTO – For the first time in a long time, economists expect the Bank of Canada to begin cutting interest rates in mid-2024 to avoid a deep recession. Last month, Bank of Canada Governor Tiff Macklem reiterated what he said when rate hikes began in March 2022, that the central bank would lower the lending rate once inflation had reached 2%. “We don’t need to wait until we get back to 2%,” Macklem then told the parliamentary finance committee on October 30. “We have to wait until we are clearly on the path to 2%”.

The increase fell to 3.8% in September from 4% in August, and while the central bank still isn’t ruling out further interest rate hikes, many economists believe the lending rate will remain stuck at 5% until the middle of next year and then it will start to go down. The announcement came on the heels of the central bank’s projection that inflation would remain around 3.5% for next year before falling to 2% by mid-2025. What if the lending rate remained at 5% until by mid-2025, Canada would likely be in a deep recession that the central bank itself wants to avoid, economists say.

High interest rates are also pushing up housing costs and keeping purchasing sticky, David Macdonald, senior economist at the Canadian Center for Policy Alternatives, told the Toronto Star, and the decline in home prices has been slower than expected. “Lower home prices were supposed to offset increases in mortgage and rent costs, but they didn’t,” he said. Typically, when interest rates rise, home prices fall, but rapid growth in Canada’s population due to record levels of immigration, a limited housing supply and growing investor interest in real estate have kept home prices stubbornly high, experts say.

There is concern that once the Bank of Canada cuts rates, people will flock back to the housing market, driving up prices and fueling inflation, repeating the housing frenzy seen during the pandemic. On the other hand, “tariffs are pushing many potential first-time homebuyers out of the market and driving rental costs even higher” Royce Mendes, managing director and head of macro strategy at Desjardins, told the Toronto Star. “There is this bilateral risk, but I’m not worried that (the rate cut) will create this explosive growth in real estate. The real problem in the housing sector is supply and being able to build more can help.”