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First Interest Rate Cut of the Cycle

The Latest Monetary Policy Decision

On June 5, 2024, the Bank of Canada (BoC) announced a reduction in its target for the overnight rate to 4¾%, with the Bank Rate at 5% and the deposit rate at 4¾%. This move comes as part of the BoC’s ongoing policy of balance sheet normalization. The decision reflects the global and domestic economic conditions, with the global economy growing by approximately 3% in the first quarter of 2024. This aligned with the Bank’s April Monetary Policy Report (MPR) projection. Overall, this signaled a pivot to a cycle of Interest Rate Cuts: The exact timing of future cuts remains data driven.

Global and Domestic Economic Landscape

In the first quarter of 2024, the U.S. economy experienced slower-than-expected growth due to weaknesses in exports and inventories. Whereas the euro area and China’s economies showed stronger activity. Inflation in advanced economies continues to ease, albeit at varying speeds. Oil prices and financial conditions remain stable since April; however, are factors to watch in assessing the speed of future cuts.

Domestically, Canada’s economy resumed growth in the first quarter of 2024. Canada achieved a 1.7% GDP growth rate, which was slower than forecasted. Despite solid consumption growth and increased business investment and housing activity, weaker inventory investment dampened overall activity. The labor market showed continued hiring, though employment growth lagged behind the working-age population increase. Wage pressures appear to be moderating gradually, indicating an economy still operating in excess supply returning to equilibrium.

Canada was the first economy in the G7 to cut its interest rate. Canada can depart from its neighbors over the short-term. However, any meaningful departure in direction will translate to currency depreciation and ultimately inflation. There is historical evidence that Canada’s interest rate can be approximately 1% below the United Stated Federal Reserve. After today’s decision, the gap stands at 0.75%.

Easing Inflation and Interest Rate Cut

CPI inflation in Canada further eased to 2.7% in April. Core inflation measures also slowing, suggesting a continued downward momentum. The breadth of price increases across CPI components has declined and is near historical averages. Although shelter price inflation remains high. This easing of underlying inflation led the BoC’s Governing Council to reduce the policy interest rate by 25 basis points. Ultimately this reflects increasing confidence that inflation will move towards the 2% target. Historically, a restrictive policy has interest rates 1% above the rate of inflation; which implies that there is room for more interest rate cuts.

Implications for Condominium Reserve Fund Investments

The BoC’s decision to cut interest rates has significant implications for condominium reserve fund investments. Lower interest rates generally lead to lower returns on fixed-income investments, such as Guaranteed Investment Certificates (GICs), which are commonly used by condominium corporations for their reserve funds. As a result, condominium boards need to reassess their investment strategies to optimize returns while managing risks effectively.

Strategic Investment Approaches

  1. Diversification: Condominium corporations should diversify their investment portfolios to balance risk and reward. This includes a mix of short-term and long-term GICs that can offer stability in a lower-interest-rate environment.
  2. Laddering Investments: Implementing a laddering strategy for GICs can help condominium corporations manage interest rate risk. By spreading investments across different maturities, corporations can benefit from higher rates when they become available while maintaining liquidity.
  3. Regular Reviews and Adjustments: Regularly reviewing and adjusting investment strategies in response to changing economic conditions and interest rate forecasts is crucial. Staying informed about BoC announcements and economic indicators can guide timely and informed investment decisions.

What the Interest Rate Cut Means for Condominiums

The Bank of Canada’s recent rate cut signals a shift in monetary policy, influenced by easing inflation and economic conditions. For condominium corporations, this change necessitates a reevaluation of reserve fund investment strategies to ensure optimal returns and financial health. This signaled a pivot to a cycle of interest rate cuts. Before more significant reductions occur, the Bank of Canada is likely to wait until it is clear that the United Stated Federal Reserve will be cutting interest rates as well. This may take several more months to become clear. Condominium Corporations should look to lock in these interest rates now in 2 or 3 year GIC terms.

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