What are the implications of the recent interest rate cuts?
The Canadian economy is bracing for further market volatility despite recent interest rate cuts by the Bank of Canada, according to the latest forecast from Fédération des caisses Desjardins du Québec.
The report has indicated that while the central bank is in the midst of reducing rates, the economic downturn is expected to deepen before a recovery begins.
Economists Marc Desormeaux and Hélène Begin project a challenging period ahead, with economic growth likely to soften in most provinces before a more robust rebound materializes closer to 2025. The Bank of Canada has already cut rates by 50 basis points and is anticipated to lower them further in the coming months, potentially bringing the benchmark rate to 3.5% by January 2025. However, the economists noted the effects of these rate changes are expected to take between 18 to 24 months to work their way through the economy.
Desjardins has forecasted a low point in Canada’s real GDP growth, which is expected to be around 1% by the end of 2024. According to a report from the Financial Post, provinces heavily influenced by interest rates, such as British Columbia and Ontario, are projected to experience even weaker growth, with real GDP anticipated to end the year at 0.6% and 0.9%, respectively.
Gradual effects of rate cuts
Homeowners in these provinces may face higher mortgage payments upon renewal, as the anticipated rate cuts have not yet translated into immediate relief. Savings rates are rising as residents prepare for potential “future rate shocks.”
In contrast, oil-producing provinces are expected to fare better. Newfoundland and Labrador, along with Alberta, are projected to lead with growth rates of 2.2% and 2%, respectively. These provinces are benefiting from stronger performance in the energy sector, which is helping to cushion the economic blow.
Despite concerns that the Canadian dollar might weaken due to the Bank of Canada’s rate cuts ahead of the US Federal Reserve, the loonie has remained relatively stable. According to CIBC Capital Markets, the currency has weathered the recent storm better than expected. The Canadian dollar is forecasted to drop to 71.9 US cents in the third quarter of 2024 but is expected to rise to 74 US cents by the end of 2025.
Market volatility has intensified, with investors pulling back sharply, reminiscent of past economic disruptions. BMO Capital Markets noted that while major market dislocations have often preceded recessions, they do not necessarily signal an imminent downturn.
As the economy navigates these choppy waters, the impact of the Bank of Canada’s rate cuts will become clearer, with a more substantial recovery projected to unfold over the next several years.
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