Big boost in federal spending, rise in home prices could prevent cut in key interest rate.
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The Bank of Canada kept its key interest rate steady at 5% while hinting a rate cut could come in June. There were, however, two big unknown facts at play — the cost of housing and federal government spending.
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Both of these factors could end up scuppering plans to give Canadians a break on mortgages, lines of credit and credit card fees.
A lot of the assumptions in the Bank’s forecast, officially called the Monetary Policy Report, are built around the idea of housing rebounding, not in terms of prices rising but housing starts increasing.
That view is at odds with the Canada Mortgage and Housing Corporation’s recent report which said to expect lower housing starts this year with a slight increase in 2025-26, but still not at the levels of the last two years.
If housing starts don’t rebound, that leaves a big hole in the Bank’s view of the Canadian economy, something they admitted was a risk. They also noted that given demand pressures on housing, including due to the massive increase in population, housing prices could rise again.
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“House prices could increase more than anticipated due to strong demand, which would boost inflation by raising shelter costs,” the Bank’s report said.
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If that happens, don’t expect a rate cut any time soon. The Bank indicated that it’s concerned that dropping interest rates too early could also push housing prices, and therefore inflation, back up.
Bank Gov. Tiff Macklem said that while there were a range of views on the state of the Canadian economy among the council members who make decisions on interest rates, there was consensus to leave the rate as is for now. One of the reasons for that is likely the coming federal budget and its potential impact on spending and inflation.
Derek Holt, vice president and head of Capital Markets Economics at Scotiabank, told the Financial Post last week that increased spending by federal and provincial governments will add to inflation and keep the Bank of Canada from lowering rates. While many economists believe a June rate cut is possible, Holt isn’t looking for a rate cut until September at the earliest.
The inflation number in the United States came in higher than expected for March at 3.5% due to higher gas prices and mortgage rates. That now has analysts thinking the U.S. Central Reserve won’t cut the American key interest rate in June as expected.
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This, of course, could have an impact on the Bank of Canada’s decision.
Statistics Canada releases the next inflation report on April 16, the same day as the federal budget. With gas prices and mortgage rates tracking higher than a year ago, it’s quite feasible that the 2.8% recorded in February won’t be replicated in March, with inflation going higher.
That same day, the full federal budget will be released, detailing tens of billions in new spending. Despite much of that spending having already been announced by the government, Macklem said the Bank doesn’t take federal spending into account for their modelling until it has been officially released.
Parliamentary Budget Office Yves Giroux told CTV’s Power Play that there are concerns the spending in the upcoming budget will add to inflation.
Bottom line, we aren’t out of the woods yet in terms of getting relief for the economy, for consumers, and for anyone trying to get or renegotiate a mortgage. Given what is expected in the budget next week, any hope of relief will be pushed off months into the future, if not further.
Canadians hoping for relief will need to wait a little longer.
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