Bank of Canada rate cut sparks optimism in Ottawa

Bank of Canada cuts key interest rate The Bank of Canada cut its key interest rate to 4.5 per cent and signalled more cuts could be coming. CTV's Austin Lee reports.

The past year has been marred by caution for Jon Flemming and Ottawa-based H. Ken Brown Excavating.

With the dark cloud of higher interest rates looming overhead, he says many small, local construction companies have been waiting for interest rates to drop before taking on risk and kickstarting projects in and around the capital.

But the Bank of Canada cutting it overnight lending rate by 25 basis points for the second consecutive month is a sign of hope.

"There's a palpable nervousness about the pace of the economy in Ottawa and in the Ottawa Valley for sure. Excavating companies, builders, and a lot of the tradespeople we work with are all feeling the same way, so if we can maybe get a couple more cuts and improve that psychology a little bit more, we can sustain the pace of our economy here in Ottawa," said Flemming, the managing director of H. Ken Excavating.

"We need more. This isn't going to do it by itself. It's the first in what we hope is a series of cuts over the next several months."

President and CEO of the Ottawa Board of Trade was also happy to see the central bank decrease its key lending rate, saying it's a positive news for building up local business, improving consumer confidence and hopefully, boosting investment.

Meantime, while big-time developers have continued moving forward with construction projects, Flemming says he's noticing more hesitancy to take on risk from smaller players as they wait for more rate cuts.

Cuts that many economists say are expected.

"The Bank of Canada's governor has tried to be very clear that they are taking this meeting by meeting, but I think that if we continue to see an economy that may be improving gradually, but that is certainly not jumping up in terms of the pace of growth momentum, it is very likely that we will continue to see the Bank of Canada move the policy rate down," said Dawn Desjardins, Chief Economist with Deloitte Canada.

"I don't think we're looking to big reductions, but rather, at a pretty steady pace, about 25 basis points like we have just seen."

Just how much could the central bank's rate drop in the months ahead? Head researcher for Colliers Canada, Adam Jacobs, says a lot of that depends on what happens south of the border.

"The factor that is so difficult to predict is, is the U.S. going to cut? When are they going to cut? How much are they going to cut? Because there is some limit to how much we can separate ourselves from the U.S. approach," he said.

"I don't know quite what that limit is, but I think the interesting thing people will be watching is partly what's the plan in the U.S.? Because they have been holding steady while we've been cutting."

Regardless of how much the rate could drop in the months ahead, Wednesday's announcement is good news for homeowners, especially those with a variable rate mortgage.

"Those who've stuck it out so far with variable rates are being rewarded further today, as they'll see their monthly payments lower again, or more of their payment go toward their principal," said Penelope Graham, mortgage expert at RateHub.ca.

"As the mortgage market fluctuates, choosing the best rate type for your needs can be confusing. While it may be tempting to get a variable mortgage rate when cuts seem likely, it's important to take your personal risk tolerance and financial situation into account. If we've learned anything from the Bank of Canada in the last few years, it's that nothing is certain when it comes to rate direction."

For homeowners with a variable rate mortgage a cut of 25 basis points to the BOC's overnight rate means mortgage rate drop from 5.70 to 5.45 per cent.

That translates to a monthly saving of around $15 per $100,000 borrowed.

Some in the real estate sector presume that falling interest rates will translate into an increasingly active housing market with more Canadians willing to jump into the market to scoop up properties.

That has left some Canadians who have yet to enter the housing market hoping to see interest rates remain high to apply pressure on sky-high prices, ultimately forcing the market to dip.

"I can understand that, but I think there are two sides to every story and the unfortunate fact of this is that there are more owners than there are renters so there is maybe that pressure there politically," said Jacobs. "But I understand the desire for people looking for lower housing prices, attainable housing prices, and the concern that dropping rates will fire things up and bring bidding wars back. I just think we are a long way from where we were three years ago when it was zero per cent interest rates, everyone had been in lockdowns for a year, and the market was just madness."

Ultimately, Jacobs said striking a happy medium is a difficult balancing act when it comes to improving affordability across the country.

"There needs to be a balance when it comes to the housing side of things, which everyone is paying attention to, with what's happening with retail sales, unemployment is up, there are signs of weakness in the economy and they have to balance that with the desire to bring housing prices down," he said.

"But I can understand that sentiment which is, things have gotten really expensive and there is certainly a desire by a lot of people to see a more affordable, realistic housing market."

The Bank of Canada's next interest rate announcement is scheduled for Sept. 4.