Bank of Canada's policy interest rate could dip to 4.25% by late 2024: forecast

KENNETH CHAN (DAILY HIVE) - There could be some good news for mortgage holders and other borrowers, as borrowing costs could become cheaper later this year.

If the economic trends hold, according to a new forecast by Oxford Economics, the Bank of Canada could be in a position to make its first decrease to the policy interest rate in years, since the pandemic’s early onset and after consecutive unexpected increases last year.
The 5% rate was first established in July 2023, when the rate was last increased.

Oxford Economics believes the 5% rate will be held until the middle of 2024 when the Bank of Canada will trigger the start of a cycle that lowers the rate.
By the end of 2024, the policy interest rate could reach 4.25%. But it could take a few years for the rate to gradually decrease to the 2.25% “neutral” position.

The Bank of Canada began its previous cycle of increasing the policy interest rate in March 2022 to help curb rampant inflation. It has stated that it needs to see a sustained period of stabilized inflation returning 2% before it begins the cycle of cutting interest rates.

According to Oxford Economics, by the middle of 2024, inflation will be below 3% year-over-year, with the unemployment rate nearing 7.5% year-over-year and average hourly earnings growing at about 2% year-over-year. By then, “there should be ample evidence of a firm disinflationary trend.”
It is now expected the inflation rate will return to the Bank of Canada’s 2% target by late 2024, which is about one year earlier than forecast.

The Bank of Canada’s next policy interest rate announcement is January 24, 2024, at which point it will also release an update on its monetary policy.

Moreover, it is believed Canada has already fallen into a “moderate” recession, which will result in a 1.1% drop in GDP between the third quarter of 2023 and the second quarter of 2024. This is a result of the dust beginning to settle on the rippling impacts from the previous policy interest rate hikes.
High interest rates are also leading to delays or even cancellation of much-needed housing projects, especially rental housing, due to the high borrowing costs to support construction financing.

“Economic activity will continue to contract through mid-year, as soaring debt service costs from mounting mortgage renewals push indebted households to deleverage and unaffordability extends the housing correction,” reads the forecast.

“Consumers and businesses will gradually regain the willingness and ability to spend in H2 2024, but they will likely remain on edge as interest rates only slowly ease amid ongoing uncertainty.”
The federal government is not expected to roll out major new stimulus spending, given its retargeted focus on limiting inflation and meeting its years-long timeline for balancing its budget.

When it comes to immigration, another 1.5 million people are expected to arrive in Canada between 2024 and 2025. As businesses are expected to cut back hiring and implement layoffs, the labour supply growth will outpace employment growth, which will lead to the unemployment rate’s increase to 7.5% by the third quarter of 2024. The federal government’s rationale for its elevated immigration targets is to help address Canada’s long-term labour supply shortage, but this has strained the housing supply, especially on rental housing, and put pressure on public services.

Over the longer run, Canada’s population boom through immigration will “lift the economy,” as newcomers fully settle.