Bank of Canada's policy interest rate could dip to 3.75% by late 2024: forecast

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By the end of 2024, the Bank of Canada’s policy interest rate could be 1.25% lower than the recent peak rate of 5%.

This is according to a new forecast this week by Central 1 Credit Union, which believes that, based on inflation and economic performance outlooks, there is much room for further rate cuts through the end of 2024.

The three remaining scheduled policy interest rate announcements before the end of 2024 are expected to send the rate down to 3.75%.

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The Bank of Canada made its first cut of 0.25% on June 5, bringing the rate down from 5% to 4.75%. This was followed by the July 24 cut of another 0.25% to 4.50%.

Central 1 anticipates further 0.25% cuts on each of the remaining scheduled announcements: September 4 (4.25%), October 23 (4%), and December 11, 2024 (3.75%).

But the 3.75% policy interest rate would be held until April 2025, when Bank of Canada resumes its cuts with further increments of 0.25% to reach 3.5%. This rate would further drop to 3.25% in June 2025, 3% in September 2025, and then to 2.75% as early as October 2025.

“There are few signs at this point that inflation will flare up again, although it remains a short-term risk. Economic data preceding the release of inflation data was weak. The labour market generated no new net jobs in June, while economic growth in April and May stalled after a March spike. Retail spending declined in May. While we are not seeing net employment losses in the country, the unemployment rate rose to a two-year high amidst the swelling population base,” reads the basis of the forecast.

“The economy has not been absorbing population growth, leading to lower per capita GDP. Businesses have also been more pessimistic in their outlook, with a Business Outlook Survey showing flat future sales, hiring and investment expectations, and weak small business confidence.”

A slowdown in economic growth is attributed to the higher debt servicing costs as a direct result of the heightened policy interest rate and weak housing market conditions. Although consumption is higher overall, this increased activity is driven by Canada’s rapid population growth driven by immigration.

The mortgage renewal shock beginning in the latter half of 2024 is also expected to slow the economy, with consumers reallocating more of their disposable income towards interest payments.

Central 1 also suggests that the Bank of Canada’s recent suggestions that inflation could further drop beyond expectations due to weaker household spending and excess supply in the economy.

The forecast states, “This shift in tone and direction suggests some concern from the Bank and opens the door for more aggressive rate cuts going forward.”

Early economic data suggests the recent initial rate cuts in June and July did not have a major impact on the housing market. The Canadian Real Estate Association (CREA) anticipates the slow resurgence of the country’s real estate market will begin later in 2024, based on the expectation of further rate cuts.

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Editor’s note: This piece has been corrected to reflect July’s rate cut, which was 4.50%, not 4.75%.