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The rate debate – Is a June or July cut on the horizon?

2 April 2024

As progress on the inflation front unfolds, it’s a coin toss as to whether the Bank of Canada or the Fed will be the first to cut rates.

The Canadian economy is performing much better than expected. Real gross domestic product (GDP) rose by 0.6% in January, well above the flash estimate of 0.4%, and February is looking to be another strong month. After growing less than 0.1% from March to December 2023, the economy appears to be showing new life.

The end of the public sector strike in Quebec was a major factor in January, contributing 0.4 percentage points after reducing output by 0.2-0.3 percentage points in December. Overall, service sectors were higher in January, particularly the healthcare sector, which saw a month-over-month (m/m) advance of 0.8%, and the real estate sector, which rose by 0.4%.

On the goods side, manufacturing saw a 0.9% m/m increase, which fully offset December’s decline, while the utilities sector grew by a substantial 3.2% m/m. However, these gains were partially offset by a 1.9% m/m drop in the mining, quarrying and oil & gas sector, primarily due to a 4.2% m/m decline in oil and gas extraction.

Looking ahead, it’s expected that a rebound in the oil and gas, manufacturing, and finance and insurance sectors will contribute to gains in February.

The unexpected GDP growth in January, along with the guidance for February, have first-quarter GDP tracking above the Bank of Canada’s current forecast of 0.5% quarter-on-quarter annualized. While the data could be a statistical illusion from a warmer winter upsetting the seasonality adjustments, the slight uptick in consumer confidence indicates that it may not solely be a statistical artifact.

While this strong economic data presents a challenge for the Bank of Canada, the market is still pricing in a rate cut in June. The April Monetary Policy Report will give us a good indication if the Bank intends to hold off until July.

U.S. Rate Outlook

The slightly lower than expected U.S. inflation figure last Friday supports the outlook of a mid-year rate cut by the Fed. There were upward revisions to prior rates for both the headline and core inflation measures. This suggests the Fed will not immediately pull the trigger on its first rate cut of the year. However, Fed Chairman Jerome Powell noted that the data was “pretty much in line with our expectations.”

Despite the Fed notching up its inflation and growth projections, it has indicated a willingness to tolerate higher inflation levels for an extended period and an openness to easing back on its quantitative tightening measures. This suggests that the Fed could move on rates as early as June.

Housing Affordability Watch

CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis

The Canada Housing and Mortgage Corporation (CMHC) is vital in maintaining stability and accessibility in Canada’s housing market. It achieves this through providing mortgage insurance and securitization services. However, despite its crucial role, CMHC has shown little innovation in the past fifteen years to improve the efficiency of the housing finance system. To address housing affordability issues, CMHC must make this a priority. The latest Housing Affordability Watch suggests several innovations CMHC could consider, such as digitization and streamlining securitization processes, to enhance market efficiency. 

For the full slate of proposed measures, read the complete article here:  Enhancing Efficiency of the Housing Finance System to Improve Affordability


Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.

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