The Big Banks are slashing their interest rate forecasts

  8/8/2024 |   SHARE
Posted in Canadian Economy and Interest Rates by Vanguard Realty | Back to Main Blog Page

The extreme volatility experienced in global financial markets over the past week is having an immediate impact on Canadian interest rate forecasts—they’re falling like autumn leaves in a gusty wind.

TD, CIBC and BMO have led the way with their revised forecasts, with all now expecting the Bank of Canada to cut interest rates faster and deeper over the next 16 months.

Just a couple of weeks ago we reported on CIBC and TD’s interest rate forecasts, which predicted an additional 175 basis points (1.75 percentage points) worth of Bank of Canada rate cuts by the end of 2025.

Well, both banks have updated those forecasts and are now predicting 200 bps (two percentage points) worth of easing by the end of 2025. This would bring the overnight target rate down to 2.50%, a level last seen in the fall of 2022.

Updated forecasts from RBC, NBC and Scotia in light of last week’s market volatility have not yet been released but are expected to include downward revisions to the Bank of Canada’s overnight target rate.

What’s going on with global financial markets?

The market turmoil began early in earnest on Friday and is being driven predominantly by events in Japan and the U.S.

In Japan, concerns arose due to a change in the Bank of Japan’s long-standing negative interest rate policy. On July 31, the central bank raised its short-term policy rate to 0.25%, its highest level in 15 years, from a range of 0-0.1%.

That led to an unwinding of the yen carry trade, where investors had borrowed yen at low rates to invest abroad. This rapid reversal triggered a sharp selloff in Japanese stocks, with the sell-off eventually spreading to global financial markets.

Meanwhile in the U.S., fears are mounting that the Federal Reserve’s high interest rates could send the economy into recession and that the central bank is being too slow to respond.

Recent weak employment data and disappointing earnings from major tech companies have increased expectations of imminent rate cuts, further contributing to market instability and a plunge in the U.S. 10-year Treasury.

And since Canadian market moves often take their lead from U.S. markets, Canadian bond yields also plummeted to two-year lows, leading to a fresh round of fixed mortgage rate cuts.

BoC growing more concerned about downside risks

And adding fuel to the fire, fresh insights from the Bank of Canada provided further confidence that rates are likely to drop steadily in the near term.

The summary of deliberations from the BoC’s July 24 monetary policy meeting revealed that the Bank is now growing more concerned about downside risks to the outlook as opposed to upside risks to inflation.

“The downside risks to inflation took on a greater importance in their deliberations than they had in prior meetings,” the summary reads, adding that the Governing Council is now placing “more emphasis on the symmetric nature of the inflation target.”

“Similar to the July Monetary Policy Report, the deliberations focused on downside risks to the consumer spending outlook, as a growing number of households renew mortgages at higher rates in 2025 and 2026 and labour market slack builds,” wrote Michael Davenport, economist with Oxford Economics.

“We share this concern and think that the wave of mortgage renewals and building job losses will cause consumers to cut discretionary spending in the near term. This should prevent a meaningful pick-up in consumer spending until the second half of 2025 and convince the BoC that more rate cuts are necessary,” he added.

But not all observers believe the debate over the outlook for Bank of Canada rate cuts is a “dichotomous contrast” between slashing rates in the face of a looming recession vs. no cutting at all. Instead, a more balanced approach is needed, argues Scotiabank’s Derek Holt.

“I’ve argued that easing is appropriate to re-balance the risks from significantly restrictive policy, but that the steps should be pursued carefully,” he wrote. “Cutting too fast and too aggressively with very dovish guidance risks resurrecting inflationary forces. The economy is resilient and inflation risk remains elevated, so be careful in crafting monetary policy.”

Source: Canadian Mortgage Trends

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