Economists caution that the Bank of Canada should proceed with care when considering interest rate cuts, despite widespread expectations of immediate measures in July. The heightened risks linked to inflationary pressures necessitate a more measured approach.
The Canadian currency's heavy reliance on trade with the United States and robust housing demand raise concerns about a potential steep surge in real estate values. Aside from that, wage growth outpacing consumer price increases adds to these concerns.
Rapid interest rate cuts, economists warn, may exacerbate inflationary pressures and jeopardize the strides made in combatting inflation. Pedro Antunes, Chief Economist at the Conference Board of Canada, noted the Bank of Canada's apprehension regarding the prospect of a complete downturn in inflation.
This week, the Bank of Canada implemented its first interest rate cut in over four years, bringing rates down to 4.75%. Consequently, expectations have been heightened for a further reduction to 4% by year-end. That said, a series of consecutive rate cuts may trigger inflation.
One pivotal factor revolves around the state of interest rates in the United States. Should Canadian rates decline while remaining steady south of the border, the Canadian dollar could weaken, resulting in higher import costs and inflationary pressures.
Pedro Antunes suggests that rate reductions will proceed cautiously, given the stance of the US Federal Reserve. Additionally, the surge in housing demand amid declining rates remains a factor to monitor closely.
Demand for housing in Canada has been constrained by elevated interest rates, yet the imperative for construction persists. The Royal Bank of Canada projects that an average of 315,000 housing units will need to be erected annually until 2030 to satisfy demand.
According to Phil Soper, CEO of Royal LePage, rate reductions will stimulate activity in the housing market, potentially resulting in higher prices in the latter half of the year.
Economists also highlight the escalation in wages as a potential driver of inflation. While average hourly wages surged by 4.8%, consumer price growth decelerated to 2.7% in April.
The increase in wages, despite declining productivity, can directly impact inflation. Governor of the Bank of Canada Tiff Macklem mentioned that the elevated home prices and wages present challenges to inflation control and rate reduction efforts.
Login in Personal Account
153