Will Rate Cuts Come in 2024?

Will Rate Cuts Come in 2024?

As 2024 gets going, the Canadian economy is at a critical crossroads. Following a period of prolonged high interest rates in order to curb inflation, there are starkly different predictions around if and when rate cuts may occur. Anticipating this move remains a hotly contested sport amongst analysts and economists, as the implications on deal-making and the cost of capital would be momentous. 

The Bank of Canada’s steady stream of interest rate hikes has had far-reaching implications for consumers, businesses, and the broader economic landscape. The measures are meant to stabilize prices and drive down inflation, which is at the top of mind for most Canadians. But as the economy continues to shrink, analysts wonder if the hikes will have the intended effect of staving off a recession. 

Some analysts believe that, even as growth remains stagnant through the first part of the year, even leading to a proper recession, the momentum generated by steadying prices and a booming job market will see the economy stabilize, leading to rate cuts as early as the spring. 

As the Bank of Canada holds its key interest rate target at 5% through the end of 2023, inflation still remains at 3.1% – well above the Bank’s 2% target. 

Arif Bhalwani, a leading Canadian investor and entrepreneur, is CEO of Third Eye Capital, a private debt firm that he co-founded. Bhalwani has witnessed first-hand the effects of increasing interest rates on the cost of capital from Canadian banks.

“Canadian banks are more wary to lend than they have been in many, many years,” says Bhalwani. “There’s a trio of factors holding them back: higher interest rates, higher loan provisions, and higher capital reserves. Smaller businesses will continue to struggle with paying down debt, and the majority of their loans are repayable on demand with no fixed maturities – so you may see a stream of insolvencies, which would drive credit availability even lower.”

Arif Bhalwani says that firms like his have stepped in as problem-solvers in the reeling economy. “We have a playbook of sophisticated capital solutions, allowing us to provide flexible capital to asset-rich companies who are being shunned by the big six banks.  We will remain agile, offering our experience with financial turnarounds and providing businesses with guaranteed execution through a single party.”

As cycles of reduced credit continue to pile up, opportunities for firms like Third Eye Capital will increase steadily. The strength of the overall economy may well depend on this sector’s ability to fill the gaps in credit left behind by a skittish national banking system.

Even if the system is experiencing a correction that it should have handled years ago, with so many years of artificially low interest rates, the stress of the rate hikes on the Canadian economy continues to cause ripple effects that are hard to predict. The target rate, according to many analysts, should be around 3% – well above the 1.75% average from before pandemic. 

If rates are indeed lowered by spring, the cuts would go a long way toward boosting consumer spending, supporting business expansion, and stimulating the housing market. The risks of a rate cut remain a reigniting of inflation and a potentially dangerous increase in cheaper credit, leading to higher debt levels for households that are already near their breaking point. 

As we await the Bank of Canada’s next move, businesses and consumers alike should be prepared for the potential shift in the economic environment. Financial planning and market strategies should be flexible enough to adapt to these changes. The coming months will be crucial in determining the trajectory of the Canadian economy as it continues to navigate fluctuating interest rates.