Jean-François Perrault says housing affordability unlikely to improve in the next five years.
‘It seems unrealistic at this point for the BoC to cut in June’: Scotiabank’s chief economist on where rates, the economy and housing prices are headingIt’s been just over two years since the Bank of Canada began its aggressive tightening policy in March of 2022. With the Bank of Canada anticipated to soon pivot and start cutting the overnight rate, hopes and signs of an economic rebound are growing.
As to whether or not the Fed actually does need to cut interest rates, you’ve got to think about monetary policy and the way monetary policy makers think about it, which is it takes a long time for their policies to impact activity. So, while we think the Fed cuts in the second half of this year, that’s really thinking about normalizing policy so that in 2025 and beyond inflation goes to where they need it to.
On the flip side though, in Canada, is the inflation data have been coming in and surprising to the downside. There is this different inflation dynamic between Canada and the U.S. Canadian inflation is slowing, U.S. inflation is accelerating. So even though growth is being revised up in Canada, it does suggest that there is more likeliness to a rate cut in Canada than in the U.S. at this point or certainly more rate cuts in Canada this year than in the U.S.
On the labour side, it’s a little bit different. You’re still seeing companies complain about labour shortages, you’re still seeing significant wage gains being offered. You’re still seeing companies hoard workers. It’s unusual in the sense that typically when the central bank raises interest rates, you get a slowdown in economic activity that lowers employment growth, in fact, lowers employment levels and you get some downward pressure on wages. We haven’t really seen that.
When you consider we may be in an environment of higher for longer interest rates, do investors have to lower or moderate their earnings growth expectations? There’s been a lot of surprises or turn of events. Not too long ago, we were talking about the risk of a recession. At the beginning of 2023, there were talks about rate cuts but instead, after a pause, there were two rate hikes mid-year. At the start of this year, people were talking about six rate cuts by the Bank of Canada starting potentially as early as March and now those expectations have been scaled back.
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