Bank of Canada Holds Steady: No Change to Rates Amid Economic Landscape

Good news for Canadians! The central bank now expects inflation to drop to 2.2% by the end of 2024, better than the earlier forecast of 2.4%. Inflation is still projected to reach the 2% target by 2025.

Can We Expect Further Hikes in 2024?

Experts initially expected inflation to drop to around 2%. They projected this trend to continue through 2024 and 2025.

However, economists warn that there are risks of higher price pressures. Additional rate cuts beyond the anticipated one in July will depend on inflation slowing more than it has recently. 

Most economists, 16 out of 30, predict the Bank of Canada will lower its policy rate to 4.00% by the end of 2024. Four major banks forecast four rate cuts this year. Apart from that, 10 economists expect the rate to stay at 4.25% or higher. Only four believe it might drop to 3.75%.

The central bank may adjust its stance based on housing market stability. Average home prices are falling due to higher mortgage rates. 

These rates are much higher than the low rates during the pandemic. As a result, the BoC remains cautious. 

They aim to ease policy gradually and are more concerned about rising inflation than falling inflation. If inflation doesn’t slow or house prices increase too quickly, further easing might be delayed.

Most economists, about 70%, believe the end-2024 rate will likely be higher than anticipated, rather than lower. Canada’s economic growth is expected to be 1.0% this year and rise to 1.8% in 2025.

Factors Influencing the Decision

The Bank of Canada (BoC) has set its key interest rate at 5% by 2024, signaling a cautious outlook amid ongoing economic challenges. Several key factors have contributed to the Bank’s decision to keep interest rates in Canada unchanged. 

  1. Inflation: Inflation has fallen, with the Consumer Price Index (CPI) inflation rate falling to 3.8% by September 2023. The BOC expects inflation to remain at 3.5% until mid-2024 and gradually reach its 2% target by the end of 2025.
  2. Economic Growth: The Canadian economy contracted at an annual rate of 1.1% in the third quarter of 2023. The slowing economic growth is expected to continue through 2024.
  3. Unemployment Rate: The unemployment rate rose to 5.5%, indicating a cooling job market compared to the strong employment figures seen in previous years
  4. Retail Sales: Retail sales declined by 0.1% in August 2023, indicating that consumer spending has slowed amid rising housing costs.

These figures confirm the BoC’s decision to keep rates tight, with cuts expected in mid-2024 as the economy continues to slow

Real Estate Market Thrives as Spending Slows: What Could Change?

Even though the Bank of Canada is keeping rates steady for now, several things could change their mind in the future:

1. Inflation Trends

If inflation starts rising again or doesn’t continue to fall as expected, the BoC might need to change rates to keep prices stable.

2. Economic Growth

If the economy grows too quickly or starts having problems, the BoC might adjust rates to either support growth or slow things down.

3. Global Events

Changes in the global economy, such as trade issues or international conflicts, could affect Canada and lead the BoC to change its rate policy.

4. Housing Market

The BoC will keep an eye on the housing market. If home prices increase rapidly or if the housing market gets too hot, they might adjust rates to manage these changes.

What Does this Mean for Canadians?

The BoC’s decision to stabilize everyday Canadian prices has several implications:

1. Loan Rates

With interest rates unchanged, borrowing costs for mortgages, personal loans, and other debt products remain relatively constant. This provides some relief to cost-conscious households, especially during periods of rising rents.

2. Savings and Investments

Effect of return on savings and investment retention rates. Savers and investors will continue to see declining returns as the currency stabilizes. Bank holders see little change in their interest rates.

3. Economic Position

The decision to stabilize rates could help the overall economy. It avoids sudden shocks to the financial system and allows companies and consumers to plan with some confidence.

4. Market Reaction

Financial markets may react to the BoC’s decision by adjusting stock and bond prices. Investors will need to stay abreast of economic indicators and central bank policies to watch for possible changes in the market.

The Bank of Canada’s decision to hold steady on interest rates reflects a nuanced approach to economic management. 

The impact of the “Missing Middle” on Canada’s housing market, businesses, and real estate shows how closely linked monetary policy is with daily life. The Bank of Canada’s decisions are very important for everyone in Canada.

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