The recent decrease in interest rates by the Bank of Canada by 25 basis points was anticipated by the market and is expected to provide the necessary stimulus for the Canadian economy to start prospering again. This move is significant as it sets Canada apart from the Federal Reserve, which has remained on hold.
Of particular interest to investors, Canada has become the first economy among the G7 nations to start lowering rates, both sooner and faster than the Federal Reserve. Following the Bank of Canada’s decision, the European Central Bank (ECB) reduced its rate by 25 basis points as well. Meanwhile, in contrast, the Bank of England has opted to remain on the sidelines, keeping its rates constant. This shows an interesting divergence in monetary policy among major economies for managing economic conditions. For real estate investors, the Bank of Canada’s rate cut is particularly noteworthy as it could lead to lower borrowing costs and improved affordability, which are critical factors in the real estate market.
I believe the Bank of Canada’s decision to decrease rates is the right move to provide a much-needed stimulus to the Canadian economy, given the economic context of an excess supply in the market, labour market data, and a continuing downward trend in the inflationary environment, which is now closer to the 2% benchmark set by their guidelines.
Looking ahead, I forecast there will be another 25 basis point decrease in the upcoming July meeting, followed by two further 25 basis point reductions later in 2024 after a brief pause in September. This strategy would allow the market to fully absorb the impact of the initial cuts. By the end of 2025, I anticipate the Bank of Canada will have lowered rates by approximately 100 basis points in total, and potentially more, which would bring the rates closer to the 3% neutral rate of interest.
South of the border in the US, the Federal Reserve is likely to start decreasing rates around the fourth quarter of this year, while the ECB is projected to continue its rate cuts well into 2025. Meanwhile, the Bank of England will probably begin its decreasing cycle, to ease its monetary policy, in August. These global monetary trends suggest a period of lower borrowing costs across major economies, which could influence investment decisions.
Overall, the Bank of Canada’s rate cuts are poised to provide much-needed stimulus to the Canadian economy. For real estate investors, the resulting lower interest rates and improved market conditions could be a positive sign.