Lower interest rates good news for industry, capital-intensive Alberta economy: economists

Now sitting at 3.75 per cent, the key interest rate is still well above rates seen any time after the 2008 financial crisis

Matt Scace
Ottawa
November 18, 2024

The Bank of Canada lowered its key interest rate again on Wednesday, likely reducing the burden on homebuilders and businesses managing capital-intensive projects in Alberta, economists say.

The decision, widely expected by observers, comes after several consecutive months of moderate inflation across Canada, a trend the Bank often responds to by setting the key rate at a “neutral” level, often between 2.25 and 3.25 per cent.

Now sitting at 3.75 per cent, the key interest rate is still well above rates seen any time after the 2008 financial crisis. Trevor Tombe, economist at the University of Calgary, said it’s unlikely Canadians will see rates close to one per cent, barring a major economic slowdown.

“A normal, on-target rate of inflation — in a normal, sustainable, balanced economy, not in a boom, and not in a bust — requires the bank rate be in that neutral range,” Tombe said. “Anything lower than that would be stimulative monetary policy.”

In its report, the Bank said that while overall inflation has stabilized, the distribution of inflation for specific categories “remains wider than usual.” Overall, lowering inflation reflects lower energy prices and “weaker underlying inflationary pressures.”

People with variable-rate mortgages and lines of credit will feel the effects almost immediately, said Charles St-Arnaud, Alberta Central chief economist. That may help stimulate demand in the housing market, he said, as prospective buyers may feel more inclined to enter the market — though with at least a few more rate cuts expected in the near future, those people may continue to wait on taking out a mortgage.

“It’s October, you know rates will go down more in the future, you might be willing to sit out the market for another three months, four months,” St-Arnaud said.

While further cuts will likely increase demand, lower borrowing rates will also make it slightly easier for builders to finance housing developments, he said. Housing starts have notably been a source of strength for Alberta compared to other provinces: over the first six months of 2024, housing starts in the province increased 28 per cent compared to the same period a year earlier, reaching record levels.

This piece of good news has mostly been driven by Alberta’s relatively less cumbersome regulatory and permitting environment, St-Arnaud said. In cities such as Toronto, where housing starts are significantly lower and permitting processes are more burdensome, whether declining interest rates have an effect is still to be seen. “In areas of Canada, that’s a bigger constraint than here in Calgary,” St-Arnaud said.

However, it remains an open question as to whether Alberta has already maximized its capacity for homebuilding, given standing concerns around the pool of workers available to support these projects.

The lower borrowing rates will also spur consumer spending and business investment — the latter of which is particularly relevant for Alberta, one of Canada’s most capital-intensive economies, primarily due to its major oil and gas operations, Tombe said.

“Economic conditions are driven more by those investment decisions than any other province, and so these rate reductions might be more favourable for Alberta,” Tombe said.