Longer Wait Coming For Interest Rate Relief, If Coming At All

The global economy, despite concerns about slowing growth, seems to be displaying signs of resilience. Both the United States and Canada have witnessed unexpected strength in their economies, prompting questions about the likelihood of rate cuts in the near future. In this blog post, we explore the recent economic developments and their potential impact on interest rates.

Bright Spots in the Canadian Economy

Surprising many experts, Canada’s real GDP growth estimates for the fourth quarter of 2023 revealed a better-than-expected performance. Preliminary estimates suggest that the economy grew at an annualized rate of 1.2%, reversing the negative growth trend recorded in the previous quarter. This unexpected resilience has relieved concerns of a technical recession and provided a glimmer of hope for the Canadian economy.

However, this positive economic growth comes with its own set of challenges. As the economy strengthens, it becomes increasingly difficult to control inflation. The fear is that a robust economy could lead to higher inflationary pressures, making it more challenging for the central bank to implement effective monetary policy.

Surprising Job Growth in the US

Meanwhile, south of the border, the United States experienced an astonishing surge in job growth. The US Non-Farm Payroll report revealed that the economy added 353,000 jobs in January, nearly doubling analyst expectations. Additionally, the report also revised upwards the December job numbers, further highlighting the strength of the US labour market. Wage growth remained strong at 4.5% year-over-year, indicating a healthy and prosperous economy.

Implications for Interest Rates

The robust economic performance in both Canada and the United States has sparked discussions about the future of interest rates. Despite the aggressive rate hikes of the past two years, both economies continue to display resilience and exhibit strong economic indicators. This has led to a shift in market expectations regarding rate cuts.

Previously, many economists anticipated rate cuts in 2024, with some even predicting cuts as early as March. However, following the release of the recent economic data, the likelihood of a March rate cut has diminished significantly. Derek Holt, the VP of Capital Market Economics for Scotiabank, warns that markets may be pricing in rate cuts “far too early and far too large.” Senior economists from other banks share a similar sentiment, with most expecting no change to interest rates until June.

While the avoidance of a recession and the emergence of a soft landing are positive developments, it seems that hopes for immediate interest rate relief may have to be tempered. The current strength of the economies in both Canada and the United States acts as a factor that prolongs the maintenance of elevated interest rates. Tiff Macklem, Governor of the Bank of Canada, has consistently cautioned that taming inflation in the final stage could prove to be the most challenging.

Keep in mind

So keep in mind, that the recent economic data from Canada and the United States has provided an unexpected boost to their respective economies. However, this positive growth has raised concerns about the potential impact on interest rates. With market expectations shifting away from rate cuts in the near term, it appears that the wait for interest rate relief might be longer than anticipated. The central banks will need to carefully monitor the evolving economic landscape and strike a delicate balance between stimulating economic growth and managing inflationary pressures.