One economist says that over the longer term, Canada’s interest rate-cutting cycle will spur strong economic growth relative to the U.S.
James Orlando, director and senior economist at TD Economics, said in an interview with BNN Bloomberg on Wednesday that over the last two years, Canadians “have been suffering the weight of high interest rates.” He added that due to high levels of debt, Canadians are more sensitive to elevated borrowing costs.
“Looking forward, we keep wondering when Canada (is) going to have its time to shine with respect to high economic growth,” Orlando said.
“The change in interest rate policy, going from the Bank of Canada having five per cent policy rates to continuously likely cutting over the next year, year and a half, that is a big tailwind for Canadians, where we’re going to be able to have less of our disposable income going to mortgage payments.”
As a result of the cutting cycle, he said Canada’s economy will likely be able to partially close its gap relative to the U.S. regarding economic growth.
Bloomberg News reported Tuesday that Canada’s consumer price index (CPI) rose 2.9 per cent in May from a year earlier, coming in higher than the 2.7 per cent figure from the previous month. The unexpected increase in Canada’s CPI reduces the odds of another interest rate cut from the Bank of Canada next month.
Orlando said that the prospect of a July rate cut from the central bank is “up for debate right now.”
“The point that we’re trying to make is that whether or not they (Bank of Canada) do cut in July, they are in a cutting cycle. So they could cut in July or they can cut in September,” he said.
Orlando highlighted that he is expecting a cut in September and another in December.
“Now this is opening the door for going from (a) 4.75 (per cent policy rate) to 4.25 (per cent) by the end of this year. But it’s not going to stop right there,” he said.
“We’re expecting further cuts, getting to 2.25 per cent by the beginning of 2026. So that’s a big difference, getting to around two per cent interest rates from 4.75 (per cent) right now, that’s a big change. That’s a big shift in the interest rate dynamics in Canada.”
Business investment, housing affordability
Additionally, Orlando said Canada’s economy is likely to benefit from increases in business investment and pointed to large projects underway in Canada’s EV battery industry.
He also said that Canada’s housing market has historically received a high degree of investment relative to the size of the economy as builders have been incentivized by asset appreciation.
The federal government has also moved to incentivize more home building in efforts to address affordability issues, outlining new policy initiatives in the 2024 budget that aim to build 3.9 million homes by 2031.
However, Orlando said he thinks it’s unlikely the federal government will be able to meet its targets.
“We don’t think that they’re going to be able to achieve their targets with respect to how much housing they need to get more affordability in Canada. So it’s not like we’re thinking affordability is going to improve,” he said.
“But one thing that we do think is going to happen is we do think that building will accelerate. It’s just not going to accelerate enough to close the gap on affordability.”
Even if the government falls short of its home building targets, Orlando said increased building will mean increased investment spurring Canadian gross domestic product growth.
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