The Bank of Canada has eased its concerns about a potential surge in home prices as it reduces its benchmark interest rate, according to minutes from the governing council’s recent meeting.

The July 24 meeting, which resulted in a second consecutive quarter-point rate cut, was documented in the minutes released on Wednesday. The central bank’s policymakers evaluated risks to inflation and the broader Canadian economy, including immigration rates, wage pressures, and the housing market.

Historically, the governing council had closely monitored housing activity as it approached lower policy rates, fearing that a sudden reduction in borrowing costs could drive up home prices and jeopardize progress in controlling inflation. However, the latest deliberations reflect a diminished concern over such risks. The council acknowledged that while declining mortgage rates or unexpected population growth could stimulate housing demand and supply constraints due to delayed construction, the likelihood of a significant spike in house prices from rate cuts has decreased.

Reactions in the housing market to the recent rate cuts have been relatively subdued, with only a slight increase in sales reported in some regions. The central bank observed that resale activity has been slower than anticipated. Despite expectations for a substantial increase in residential building investment next year, the council noted that the demand-supply imbalance is likely to persist, particularly in urban rental markets where new residents commonly settle.

The council also highlighted ongoing challenges in housing affordability, which may exert further upward pressure on rents. Immigration trends were frequently referenced, with expectations that the proportion of non-permanent residents will rise despite efforts to limit temporary worker and student inflows, adding uncertainty to the economic outlook.

The deliberations also addressed the labor market, noting an increase in unemployment to 6.4 percent and anticipated persistent slack as the labor force grows faster than employment. The central bank remains confident that wage growth will moderate with the slackening labor market. Policymakers expressed a consensus that additional rate cuts could be appropriate if inflation trends align with the 2 percent target.

Market analysts have observed a shift in the Bank of Canada‘s focus towards economic growth concerns rather than inflation risks. BMO and CIBC forecast further rate cuts in 2024, with the next interest rate decision scheduled for September 4.