Controversy over Bank of Canada's plan to cut interest rates: economic boost or hidden concerns?
According to the latest forecast from Central 1 Credit Union this week, based on the outlook for inflation and economic performance, by the end of 2024, the benchmark interest rate of the Bank of Canada may be 1.25 percentage points lower than its recent peak of 5%, reaching 3.75%.
It is expected that the remaining three planned benchmark interest rate announcements by the end of 2024 will lower the interest rate to 3.75%.
The Bank of Canada cut interest rates for the first time by 0.25% on June 5th, lowering the rate from 5% to 4.75%. Subsequently, on July 24th, the interest rate was further reduced by 0.25% to 4.50%.
Central 1 expects that the central bank will cut interest rates by 0.25% on each of the remaining plan announcement dates: September 4th (4.25%), October 23rd (4%), and December 11th, 2024 (3.75%).
But Central 1 expects the benchmark interest rate of 3.75% to remain until April 2025, when the Bank of Canada will continue to cut rates by 0.25% to 3.5%. This interest rate will decrease to 3.25% in June 2025, 3% in September 2025, and 2.75% as early as October 2025.
Image source: Andy Dean Photography
According to the Central 1 forecast, there is currently almost no sign that inflation will rise again, although there are still risks in the short term. The economic data was weak before the release of inflation data. The labor market did not generate any new net jobs in June, and economic growth in April and May stagnated after reaching its peak in March. Retail spending decreased in May. Although we have not seen a net employment loss nationwide, the unemployment rate has risen to a two-year high against the backdrop of an expanding population base.
Central 1 states that the economy has not absorbed population growth, resulting in a decline in per capita GDP. Enterprises are also more pessimistic about the prospects, with business outlook surveys showing that future sales, recruitment, and investment expectations remain unchanged, and small business confidence is weak.
The slowdown in economic growth is attributed to higher debt service costs caused by high interest rates and weak real estate market conditions. Despite overall high consumption, the increase in this activity is driven by Canada's rapid population growth, primarily driven by immigration.
The impact of mortgage renewal starting from the second half of 2024 is also expected to slow down economic growth, as consumers redistribute more disposable income towards interest payments.
Central 1 also mentioned recent indications from the Bank of Canada that inflation may decline beyond expectations due to weak household spending and excess supply in the economy.
The Central 1 forecast states that "this shift in tone and direction indicates that the Bank of Canada is somewhat concerned and has opened the door for more aggressive interest rate cuts
Early economic data shows that the initial interest rate cuts in June and July had little impact on the real estate market. The Canadian Real Estate Association (CREA) predicts that the Canadian real estate market will begin a slow recovery in the second half of 2024, based on expectations of further interest rate cuts.
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