Just last month, Canadian homebuyers and homeowners got the exciting good news: Tiff Macklem, the governor of the central bank, who has always been very tight-lipped, never mentioned interest rate cuts, and has always said that "there is a possibility of another rate hike", made a rare statement to MPs that "interest rate cuts are imminent".
While people were intoxicated with the joy of announcing an interest rate cut in early June, the Federal Reserve has repeatedly stated that "the inflation outlook is not optimistic, and it will not consider cutting interest rates for the time being." Although Bank of Canada Governor McCollum has stated that "it will not follow the United States", there are still those who believe that Canada will follow the United States.
To fall, or not to fall? This requires an authoritative body to answer:
Just yesterday, Carrie Freestone, an economic analyst at the Royal Bank of Canada (RBC), gave a clear, unwavering view that is once again exciting: "Canada will definitely cut interest rates faster and more aggressively than the Fed!" ”
In the coming year, interest rates will be cut by 2 basis points
Carrie Freestone first gave the conclusion: "In the next year, that is, by the third quarter of 2025, the central bank will cut interest rates by 2 basis points, from 5% to 3%!" ”
As for the Federal Reserve? Carrie Freestone believes that the next year will only cut interest rates by a maximum of 0.75%, which is much smaller than that of Canada. Why is there such a large interest rate differential between the US and Canada? Carrie Freestone explains:
"U.S. inflation data has been much stronger than Canada's, a large percentage of U.S. goods prices have risen by more than 2% over the past few months, inflation is still a long way from a substantial slowdown, and the labor market has not softened enough."
"The central bank said in May 2024 that it was ready to cut interest rates, so before the rate cut, the Fed will also make a corresponding statement, but that should happen at the end of 2024."
Carrie Freestone predicts that the Fed will announce a 25 basis point rate cut in December 2024, and 25 basis points in the first and second quarters of next year. The Bank of Canada will cut interest rates by 25 basis points in June, then every two months until it reaches 3% by the middle of next year.
Regarding the difference between the US and Canadian interest rate cuts, in fact, last month, the governor of the central bank, McCollum, also explained: "Canada's economic conditions have been weaker than those in the United States, and inflation will fall faster than the United States, and interest rate cuts will come earlier." In addition, we don't have to follow the United States in everything, we have our own currency, we have our own independent monetary policy."
With the "double guarantee" of central bank governors and RBC experts, everyone has reason to believe that Canada will not follow the United States this time, but implement its own interest rate cutting ideas. After it falls to 3% next year, is there still room for decline? Carrie Freestone admits: "It's hard to predict. ”
Central Bank Governor McCollum's exact words were: "Please remember that you must not have the illusion of cutting interest rates to the lowest point, and that interest rate cuts are a gradual path and cannot be achieved overnight in a short period of time." ”
House prices are up 9% this year and 16% next year
Will interest rate cuts ignite the real estate market again and ignite the enthusiasm of sellers and buyers? While central bank governor McCollum only cautiously said "yes, but not necessarily again", in Carrie Freestone's view, a rapid rise in house prices is bound to happen.
"The period of calm, price correction in Canada's major markets is effectively over," said Carrie Freestone, "and home sales are up at least 3% in the coming year as people return to the market." ”
As for the house price? By the end of 2024, Canada's national home sales prices are expected to increase by 9.2% year-on-year, and by the end of 2025, Canada's national home sales prices are expected to increase by 16.1% year-on-year, which is a very rapid increase.
Of course, the property boom brought about by interest rate cuts will affect the affordability of Canadians, but even the central bank has stated that "the current monetary policy is no longer sustainable" and that interest rate cuts are imminent.
How much will the CAD-USD exchange rate be affected?
Last month, Bank of Canada Governor McCollum expressed concern about an early rate cut in Canada: "If the United States does not move, we cut interest rates first, which could lead to a depreciation of the Canadian dollar." ”
This can be a problem for cross-border travelers, such as traveling to the U.S. to cost more money. But the depreciation of the Canadian dollar is also a good thing for McCollum, because it can lower export prices and boost the Canadian economy.
RBC economist Carrie Freestone said: "The Canadian dollar is bound to weaken and the cost of imports is bound to rise, but it won't exacerbate inflation because more than half of Canada's consumer spending is on services rather than goods." ”
"In addition, the United States only imports one-third of the goods we import from countries around the world, which is only a little more than China. Therefore, an early interest rate cut will not pose a huge risk to Canada, but it needs to be careful. ”
In Carrie Freestone's view, the risk of an early rate cut is much smaller than the risk of geopolitical conflicts, which will directly send energy prices soaring, thus exposing energy powerhouse Canada to the trouble of rising inflation.
The central bank decision day on June 5 is getting closer and closer, and the answer is about to be revealed!