The Bank of Canada (BoC) has cut its benchmark interest rate by 25 basis points to 4.25 per cent, the third such cut in as many months. It's a decision housing industry observers believe could jolt buyers back into the market.

“As inflation gets closer to the target, we want to see economic growth pick up to absorb the slack in the economy, so inflation returns sustainability to the two per cent target,” BoC Governor Tiff Macklem said in Wednesday morning remarks.

The BoC followed up on rate cuts made in June and July as inflation eased to its target range of two to three per cent.

Interest rates were raised after the COVID pandemic to tame inflation that rose as high as seven to eight per cent. The rapid change in monetary policy stifled the housing industry’s ability to develop and build housing due to rising costs, and increased costs for potential homebuyers.

If inflation continues to decline, Macklem said further cuts should be anticipated.

Inflation kept raised by shelter

In July, inflation fell to 2.5 per cent, with core inflation averaged at 2.5 per cent. “There is little evidence of broad based price pressures,” Macklem said.

Canada’s economic growth beat expectations at 2.1 per cent in Q2, which played a part in the rate cut. Government spending and business investment drove the increase.

While employment has shown little change over the past few months, wage growth has been above productivity.

Shelter and other services were the main forces behind inflation, the BoC said, but shelter inflation is beginning to show signs of slowing.

“Shelter inflation is still much too high, but it looks like it is starting to roll over, it is starting to come down,” which is a trend the BoC is looking to see continue, Macklem said.

The BoC governor noted the importance of the central bank guarding against a weak economy and inflation falling below a desired level.

‘Didn’t exactly catch anyone off guard’

A rate cut was expected by most economists, a consensus Ross McCredie, the CEO of Sutton Group, reiterated.

"The Bank of Canada's decision to cut interest rates didn't exactly catch anyone off guard,” he said in remarks emailed to RENX Homes. “It's a move many of us saw coming and a trend that we expect to continue, especially with the latest inflation numbers that came out in the last couple weeks coupled with the weak numbers across the housing sector.”

Potential homebuyers who were waiting to buy a home may have finally received the push they need to jump into the market, he said.

First-time homebuyers struggling with high mortgage rates will find it “great news” as a rate cut helps with affordability. Homeowners renewing their mortgages will have an opportunity to plan ahead to ease the pressure of higher payments, McCredie added.

Policymakers are shifting their focus to jobs and housing with inflation on the decline, Phil Soper, president and CEO of Royal LePage, said in an email to RENX Homes.

First-time homebuyers now must wrestle with whether to buy now or wait, he said, as home values have mostly levelled off this year and affordability has improved due to lower borrowing costs. But Soper warned there could be a rush of pent-up demand that raises housing prices.

“This fall, we can expect more cautious Canadians to take the plunge, while those willing to take on the risk might hold out for further rate cuts," Soper said.