Are Rate Cuts Coming? Economists Say Relief May Come Sooner Than Expected

Canadians may soon see the light at the end of the tunnel. Economists forecast that the Bank of Canada may initiate interest rate cuts in mid-2024 to avert a deep recession. 

Bank of Canada Governor Tiff Macklem signaled a shift from the earlier stance that rate hikes would only follow a 2% inflation target. He told the Parliamentary Finance Committee on October 30 that the central bank need not wait until the inflation rate is back to the target percentage, but it will “need to wait until we’re clearly on a path to 2%.”

Despite not ruling out additional rate hikes, many economists anticipate a stabilization of the overnight lending rate at 5% until mid-2024. This comes in the wake of the central bank’s projection that inflation, currently at 3.8%, will persist around 3.5% for the next year before declining to 2% by mid-2025.

Related: Inflation Is Here To Stay Until 2025: Bank Of Canada

There is an 18- to 24-month lag before the full economic impact of interest rate changes can be felt, according to the central bank. Thus, keeping the overnight lending rate at 5% until the projected time inflation goes down to 2%, or in mid-2025, could plunge the country into a deep recession. And this is something the bank does not want to happen, economists say. 

Related: Bank of Canada Maintains Interest Rates At 5%

However, analysts believe the central bank will keep rates higher than the previous decade to moderate consumer spending and control interest rate-sensitive sectors like housing. Homeowners, already facing higher interest rates, may not experience the same stimulation seen in the past.

The current high interest rates are identified as a factor elevating housing costs and sustaining inflation. While conventional wisdom suggests that rising interest rates lead to lower housing prices, Canada’s unique situation, characterized by robust population growth, limited housing supply, and increased investor interest, has kept home prices persistently high.

There’s apprehension that rate cuts might reignite a housing frenzy, but experts argue that supply constraints are the primary challenge. Despite the potential risks, some economists emphasize the need for rate cuts to address the slowdown in construction. Builders face disincentives amid discouraging conditions for new constructions, and unless rates are lowered, construction is expected to decline further. 

The debate hinges on striking the right balance between controlling inflation and supporting the health of the housing market.

Information for this story was found via the Toronto Star, and the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.


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