Sun. Feb 25th, 2024

Analysis | A drop in SSD rates early 2024?

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The Bank of Canada could send a rate cut signal in its Wednesday press release. (Archive photo)

  • Gérald Fillion (View profile)Gérald Fillion

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The Bank of Canada will provide an update on its interest rates on Wednesday. No one expects the key rate to rise at a time when the economy is stagnant and inflation is almost back to the central bank's target range. In reality, the central bank could start sending a message… to cut rates.

A year ago, I wrote that economists expected a cut in the key rate in the second half of 2023. Stronger economic growth than expected at the start of the year and a slower slowdown in inflation that hoped for led experts to postpone this projection for a few months. But, obviously, at the rate things are going, we won't ultimately move very far from the forecast made 12 months ago.

The Bank of Canada could launch, in its press release on Wednesday, a rate cut signal, which could occur as early as the beginning of 2024. The first announcement of the year will take place on January 24 and the second on January 6 March. Markets and several economists expect a first cut at the April 10 meeting.

However, this projection could change quickly. Many economists predicted that a first rate cut would not occur until the summer or fall of 2024, until recently. Now talking about a drop in April is relatively new, and the latest data on the Canadian economy could lead experts to revise their scenarios.

A rate cut in March, for example, would occur just before the presentation of the federal budget by federal Finance Minister Chrystia Freeland. The latter must secretly hope that this reduction can begin as quickly as possible, to give a little oxygen and confidence to households who are very worried about their finances.

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The publication of GDP statistics on Thursday supports the scenario of an upcoming drop in interest rates. The Bank of Canada forecast GDP growth of 0.8% annualized for the months of July, August and September. Ultimately, Statistics Canada reported a 1.1% decline as business confidence plummets and business investment declines.

The decline in GDP could have been even more pronounced, had it not been for public investments. However, according to initial estimates, it seems that the 4th quarter of the year could show weak GDP growth. It is in the first half of 2024 that the Canadian economy could finally find itself in recession.

Corporate profits are down 22.4%, while overall worker compensation is up 6.8%. It is clear, according to economists at the National Bank, that businesses will not be in hiring mode in the coming months. Many could even cut jobs, which is already the case, moreover, in the financial sector.

Consumption has been stagnating for two quarters, which could further weaken the economy. According to Desjardins, real consumption per capita has fallen by 1% over the past year.

Canadians are saving more, which is not a bad thing in itself. But it is a sign of worry and uncertainty. The savings rate increased from 4.7% in Q2 to 5.1% in Q3 of 2023. In other words, households saved 5.1% of their disposable income during the quarter. The average was 2.4% between 2015 and 2019.

Moreover, the Conference Board of Canada's consumer confidence index is currently lower than at the start of the pandemic and than during the 2008-2009 financial crisis. Above all, knowing that a rate increase can take up to eight quarters to take full effect, the increases announced since March 2022 have therefore not yet had their full effect on consumption in Canada.

It is therefore entirely possible that the Bank of Canada will change its communication on Wednesday to tell Canadians that the rate hike is over and that developments in the economy could lead it to ease its policy, after a hard and rapid tightening. monetary since spring 2022.

The financial pressure on Canadian households is increasingly strong and the central bank cannot ignore it. According to Desjardins, if the interest rate trajectory predicted by the markets is confirmed, borrowers in the worst situations could see their monthly mortgage payments jump by more than 70%.

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