During the first half of 2024, the main focus of the Bank of Canada was still very much about controlling inflation.
Now that we are entering the last quarter of the year, inflation has already become an outdated topic.
According to the latest CIBC Economics Forecast, “both the US and Canada are now looking at a softening jobs market that they don’t really want or need. So cutting rates materially is really a no brainer”.
The Bank of Canada started the rate cut cycle in June.
Since then, we saw 3 consecutive 0.25% cuts, but we haven’t felt much effect in our economy or housing market.
There are 2 more chances for further rate cuts in this year, on October 23 and December 11.
Here’s the big question.
Is the Bank of Canada going to continue with its conservative 0.25% cut per announcement?
Or is it going to do it bigger and faster with some jumbo rate cuts?
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The chances of a 0.5% rate cut by the Bank of Canada on October 23 are increasing because of 3 reasons.
#1 The Fed’s Surprised Jumbo Rate Cut
About a week and a half ago, on September 18, the United States Federal Reserve surprised many investors with a 0.5% jumbo rate cut, making it the largest non-Covid-era rate cut since 2008.
There are growing concerns about a weakening labour market and the risk of rising unemployment, so the Fed decided to act more boldly to prevent further job losses and support economic growth.
This move “blows the door wide open” for the Bank of Canada to go bigger on rate cuts, says the Financial Post.
If the Bank of Canada were to do big rate cuts without matching moves by the Fed, then we run the risk of a weaker Canadian dollar.
But now the Fed has eliminated this concern for the Bank of Canada.
In fact, the 0.5% rate cut by the Fed has already had a ripple effect on Canadian bond yields, which directly influence fixed mortgage rates.
Exceptional mortgage rates are now spotted in Canada.
5 year fixed at 3.99%.
Seeing rates drop below that 4% mark is a big milestone for a lot of home buyers and current owners.
It signals that the Bank of Canada might be heading towards larger rate cuts in the near future.
#2 Underperforming Canadian Economy
Back in July, the Bank of Canada thought that falling borrowing costs, growth in exports and increase in household spending would give us a GDP growth of around 2.8% for the third quarter.
The reality?
We will probably see a GDP growth of only 1 to 1.5% by September 30.
That’s less than half of the expected growth, which means our economy is significantly underperforming.
Our unemployment rate continues to increase to 6.6% in August, compared to 5.5% a year ago.
In the high interest rate environment, companies are hesitant to invest or expand, so there are fewer job opportunities.
Recent graduates and immigrants are especially struggling to find employment.
Higher unemployment means people have less money to spend on goods and services, which directly affects businesses and slows economic growth.
The weakness in our labour market is a key reason for the Bank of Canada to consider larger rate cuts to stimulate job creation and economic activity.
#3 Mortgage Renewals
Many people who secured their mortgages at ultra low interest rates are now facing renewals at significantly higher rates.
According to the CMHC, over 2 million mortgages are expected to come up for renewal in the next 2 years.
The rise in mortgage renewal costs is outpacing income growth for many Canadians.
If interest rates remain high, a significant number of homeowners will struggle to meet their mortgage payments.
They would need to cut down on spendings somewhere else.
Since consumer spending is a key driver of the Canadian economy, this reduction could further weaken economic growth.
You see, all signs are pointing to the Bank of Canada to do bigger and faster rate cuts.
With the Fed’s unexpected jumbo rate cut, our slowing economy and millions of Canadians facing steep mortgage renewals, a more aggressive approach is clearly needed.
The Bank of Canada’s decision could make that difference between a soft landing or a recession.
Do you think we are going to see a 0.5% rate cut on October 23?
Comment below and let me know.
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