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2180 Steeles Avenue West,
Suite 204, Concord,
ON, L4K 2Z5

Phone:     905-761-7001
Toll Free: 1855-761-7001
Fax:          905-761-7005

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31 July 2019

U.S. cuts interest rates. Will Canada follow the example?

On Wednesday, the U.S. central bank cut its benchmark interest rate, marking the first decline in more than 10 years and trying to provide the necessary support to the national economy. The drop by 0.25% to 2%-2.25% was the first one since late 2008, when central banks around the world cut their rates in order to cope with the crisis.

Although the change was anticipated, it remains significant as it means the bank sees strong economic issues ahead, which were enough to provide the economic stimulation.

Today, the U.S. economy is in a much better state than during the previous rate cut, as now consumers are spending, the economy is growing and the job market is highly active.

While many indicators are quite strong, the inflation remains below the Fed’s target 2%.

According to the TD Bank economist Sri Thanabalasingam, the rate cut means the central bank is ready for one or more reductions later. "The Fed left the room for more monetary stimulus, and we expect another decline in September," - Thanabalasingam noted.

As a result, now the U.S. rate is only 0.5% away from Canada’s rate.

This rate drop only increases the headwinds for the Bank of Canada.

“In case the Fed cuts, the BoC will feel more pressure to follow the example”, - TD’s senior FX strategist Mazen Issa says.

Although the latest data shows Canada’s economy is coming back to its potential growth, growing trade tensions keep presenting a threat for the economic outlook, the BoC said in June.

“We believe that the Bank will not change the rate during the next quarters, but we expect a rate cut by 0.25% in 2020”, - noted CIBC’s Benjamin Tal.

“The Bank tells us the monetary policies are different as the Canadian and the U.S. economies are converging,” - he added. “It could be true from a short-term cyclical perspective, but from a more structural point of view, we don’t see this convergence.”

Of course, a rate cut will be great news for those who have variable-rate mortgages or lines of credit, but some specialists say it will also heat up the real estate market, increasing the household debt level.

According to CREA, home prices East of Manitoba already show recovery signs from the weak start of 2019. In case of Ottawa and Montreal, the prices reported 7.6% and 6.4% annual hikes, respectively.

“The soft landing is already over,” - Fred Demers from BMO Global Asset Management says. “When you look at the GTA and Canada in general, you see a re-acceleration.”

 

 

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