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Economists Predict Bank of Canada to Lower Interest Rate to 4.25% by Year-End

In the realm of economic forecasts, the trajectory of Canada’s inflation and the accompanying policies of the Bank of Canada (BoC) play a pivotal role in shaping the nation’s financial landscape. We, at Ratemasters.ca, delve into a detailed examination of the research conducted by Oxford Economics, shedding light on the anticipated rate drop and its potential implications on the Canadian economy.

Inflation Outlook: Navigating the Path to 2%

Oxford Economics‘ recent report suggests that Canadian inflation is poised to dip below 3% in the near term, paving the way for a return to the BoC’s 2% target by the close of 2024. This forecast hinges on the anticipation of mounting evidence pointing toward a steadfast disinflationary trend by mid-year.

Dissecting the Factors at Play

The research posits that a combination of factors will contribute to this downward trend. The deepening economic downturn, coupled with a softening in global oil and food prices, is expected to create a favorable environment for the Consumer Price Index (CPI) to align with the BoC’s target.

Bank of Canada

Implications for Monetary Policy

The benchmark policy rate, currently standing at a 22-year high of 5%, is expected to witness a transformation in the coming years. Oxford Economics contends that the BoC, armed with ample evidence of disinflation, may initiate a cycle of rate reduction starting in mid-2024.

Anticipated Rate Trajectory

The forecast suggests that the BoC is likely to maintain the policy rate at 5% until mid-2024, marking the initiation of an easing cycle. The gradual reduction is projected to lead to a policy rate of 4.25% by the year-end, signaling a shift towards a more accommodative monetary stance.

Long-term Prospects

Looking beyond the immediate future, the expectation is for the BoC to continue easing the rate, eventually reaching a neutral stance of 2.25% over the course of several years. This nuanced approach reflects a commitment to balance the need for economic stimulus with the imperative of controlling inflation.

Navigating a Moderate Recession

Against the backdrop of these monetary maneuvers, Canada finds itself grappling with a moderate recession that originated in late 2022. Oxford Economics attributes this economic downturn to weakened interest-sensitive housing, a slowdown in non-residential investment, and reduced inventory accumulation.

Economic Contractions and Housing Correction

The report indicates a 0.2% quarter-over-quarter GDP decline in Q4 2022, marking the first contraction since the initiation of the BoC’s tightening cycle. Despite the expected rate cuts, a “muted” rebound is foreseen, with economic activity potentially contracting further due to rising debt service costs and housing unaffordability.

Real Estate Market Dynamics

The Canadian resale market, still in the throes of correction, faces the prospect of home prices deteriorating by an additional 5% to 10% by mid-2024. The report posits a peak-to-trough decline of 22%. However, the silver lining lies in the larger population and persistent housing shortage, which could act as a stabilizing force on prices over time.

Outlook for Homebuilding

Oxford Economics extends its insights to the homebuilding sector, forecasting a dip in housing starts to the low-200,000 range in the first half of 2024. Higher financing costs for both buyers and builders are identified as key contributors to this decline. However, a revival is expected in late 2024, driven by an economic recovery, easing mortgage rates, and government incentives aimed at boosting housing supply.

Bank Of Canada Policy Interest Outlook

In mid-2024, there is an initiation of an easing cycle with a policy rate of 4.25%, targeting a long-term neutral stance at 2.25%. Simultaneously, a moderate recession is indicated, starting in late 2022 with a Q4 2022 GDP decline of 0.2% and further economic contraction expected by mid-2024 .

The housing sector experiences a correction around mid-2024, leading to a decline in home prices ranging from -5% to -10%. Over time, stabilization is anticipated due to population growth and a housing shortage. Additionally, the homebuilding sector is affected, with housing starts in the low-200,000 range in the first half of 2024. However, a revival is projected in late 2024, driven by economic recovery and government incentives.

Conclusion: Navigating Uncertain Waters

As Canada stands at the cusp of economic shifts, our analysis, grounded in the insights provided by Oxford Economics, offers a comprehensive view of the potential trajectory. The nuanced interplay between inflation, monetary policy, economic contractions, and real estate dynamics paints a complex picture. By staying abreast of these developments, stakeholders can make informed decisions in navigating the uncertain waters of Canada’s economic future.