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Lower Interest Rates Coming

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Lower Interest Rates are coming, the question is when. As a result, now may be the time to lock in your GIC portfolio.

Disinflation Surprise

Economists are increasingly expecting the Bank of Canada to lower interest rates. As a result of the recent consumer price index (CPI) report showing a 2.8% drop in annual inflation. The Central Bank is moving towards rate cuts, with a focus on the feedback loop between Interest Rates, Shelter Costs and Wage Data. The 2.8% CPI data paves the way for a possible rate cut in June, noting easing price pressures. The data is a positive sign that pandemic-induced inflation may be subsiding.

Persistent growth in service prices, particularly in shelter costs, could influence the Bank of Canada’s decision on rate cuts. Ironically, one of the largest factors driving shelter costs are higher interest rates. The Bank of Canada will attempt to look through this feedback loop.

United States Interest Rate Peak

The United states Federal Reserve is closely monitoring inflation data, seeking confirmation that inflation is moving towards the 2% target. Acknowledging the challenge of comparing current readings to last year’s low figures emphasizes the need for data that confirms the previous low readings. Also noting that strong hiring alone would not deter the Fed from lowering interest rates if necessary. While recent inflation data has shown increases, the Fed sees this as part of the overall downward trend. There is a belief that there now must be a compelling reason not to cut rates. Accordingly, the Fed is inclined towards a rate cut at some point unless there is a strong argument against it.

Bank of Canada Eyes Coordinated Moves with US Fed

The Bank of Canada is inclined to wait for the US Federal Reserve to move on interest rates to avoid causing an unexpected shift in currency exchange rates and capital flows. Moving in concert with the Federal Reserve can help maintain stability in the North American economic environment. However, the Bank of Canada is not strictly bound by the Federal Reserve’s actions and will prioritize domestic economic conditions and inflation targets when making its decisions. This approach allows the Bank of Canada to act independently to address Canadian-specific economic challenges, even if it means diverging from the Federal Reserve’s timeline.

Strategic Shift: The Gradual Path to Lower Interest Rates

The shift towards lowering interest rates is not a singular event but rather a strategic pivot requiring careful consideration and sustained action. As central banks like the Bank of Canada seek to stimulate economic growth and manage inflation, they must navigate a complex landscape of domestic and global economic indicators. This approach involves a series of deliberate steps and adjustments, ensuring that monetary policy remains effective and responsive to evolving economic conditions. While each rate cut represents a significant decision, it is part of a broader strategy aimed at achieving long-term economic stability and prosperity. The Bank of Canada and the US Federal Reserve will not start to lower interest rates until they are confident on this path.

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