What will influence the BoC's approach on rates for the rest of 2024?

Canadians are hoping for another spate of rate cuts before the end of the year

What will influence the BoC's approach on rates for the rest of 2024?

The Bank of Canada appears increasingly convinced that it’s finally winning a war on inflation that’s spanned over two years, with Governor Tiff Macklem sounding a confident tone in the wake of its latest announcement on interest rates.

An aggressive hiking campaign saw the central bank bump its benchmark rate by 475 basis points throughout last year and the previous, an effort to pour cold water over red-hot inflation and tap the brakes on a surging economy.

Prior to its announcement in early June, the Bank had given little indication that it was prepared to start moving rates lower, citing lingering concerns over the inflation outlook and the risk of reinflaming the economy by cutting rates too early.

But with inflation falling within the Bank’s target range for multiple consecutive announcements – and labour market data and gross domestic product (GDP) data suggesting a definite economic slowdown – Macklem struck an optimistic note on June 5 about its outlook.

“We’ve come a long way in the fight against inflation,” he said after the Bank’s 25-basis-point rate cut, “and our confidence that inflation will continue to move closer to the 2% target has increased over recent months.”

The Bank’s surprisingly dovish tone in its June announcement raised hopes that a follow-up cut could be on the way in its next decision, scheduled for July 24, and that rates could be markedly lower by the end of the year.

Bank concerned over housing market revival, divergence from Fed

While its concern over the inflation outlook appears to be easing, another consideration is looming large when it comes to the Bank’s approach for the rest of 2024 – namely, the appetite for interest rate cuts south of the border.

Shilpa Mishra (pictured top), partner and leader, capital advisory for BDO M&A Capital Markets, told Canadian Mortgage Professional that events in the US were now “the most important story” for inflation and interest rates in Canada.

She pointed to the continuing strength of the US economy, a stark contrast to the recent sluggishness of Canada’s economic performance.

“The US economic juggernaut has continued,” Mishra said. “Their economy is fired. This is driven by strong productivity and a real general-use economy. And we have a more muted economic outlook. So why is there this outlook now in Canada? Because businesses and consumers are facing headwinds. Productivity is low.

“So really the two economies, and the tale of two cities, is in my opinion the key factor that’s influencing the interest rate. While the Bank of Canada has pressure to reduce rates, they struggle to do so – given the Fed, potentially, will not be dropping rates anytime soon, and the housing market could heat up if they do so.”

While optimistic forecasts for the US rate trajectory had seen some analysts predict multiple rate cuts before the end of the year, the Fed has now indicated just one cut, or possibly two, is on the way in 2024.

That means observers should err on the side of caution when considering what the Bank’s likely approach will be in the second half of the year, according to Mishra. “I’ve said from the beginning of the year – it’s going to be slower than anticipated for those very two factors: what’s happening in the US economy and the Canadian housing market,” she said.

Canadians feeling the strain from higher interest rates

Lower interest rates, and the prospect of further central bank cuts, will be eagerly anticipated by scores of Canadians who’ve seen the cost of borrowing surge over the past two years.

Fifty-five percent (55%) of respondents to a recent Maru Public Opinion Survey expressed worries about their personal and day-to-day family finances, a figure that’s risen steadily since the beginning of 2021.

The number of people struggling to make ends meet rose to a record high, Maru’s poll said, jumping to 43% in May from 37% in March, with 28% of Canadians worse off financially in May than the previous month.

Canadians with variable-rate mortgages have been especially impacted by rate hikes since 2022, with those rates typically rising and falling in line with the central bank’s benchmark rate.

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