In an ever-changing economic landscape, discussions are intensifying around potential policy disparities between the Bank of Canada (BoC) and the US Federal Reserve, particularly regarding Bank of Canada divergence. As the American economy forges ahead, the Canadian economy is on a divergent path, sparking discussions about separate routes. This shift has the potential to significantly impact homeowners, homebuyers, and sellers in the real estate market.
The Diverging Economic Routes
The North American economic corridor is splitting, with the US showcasing robust growth while Canada’s economy appears stagnant. The latest figures reveal a stark contrast, with US real GDP rising substantially at 4.9%, while Canada struggles to show growth, particularly on a per capita basis.
A Challenge Unfolding
The divergence poses a challenge: the US needs higher rates to curb inflation amid rapid growth, while Canada’s real estate-centric economy may call for easing or at least an inability to match the pace set by the Fed.
Possibility of Divergence
According to BMO Chief Economist Douglas Porter, historical precedence exists for the BoC to separate from the Fed, primarily driven by differing economic trajectories.
Historical Indicators and the Unemployment Gap
BMO’s analysis identifies employment as a leading indicator for potential divergence. A “normal” unemployment gap of -1 point typically aligns with synchronized overnight rates.
The Bank’s Predicament
While historical patterns suggest potential divergence, the Bank of Canada may hesitate due to concerns about persistent core inflation and the impact on the Canadian dollar’s value.
Inflation Control: BoC’s Priority
The BoC’s primary mandate revolves around inflation control and maintaining a stable currency, a crucial element attracting investment, employment, and trade.
Impact on Real Estate and Currency
A potential scenario involving Canada easing while the Fed maintains or hikes rates could weaken the Canadian dollar, impacting commodities priced in US dollars. This shift may trigger inflationary pressures on essential goods.
Doubts on Imminent Divergence
BMO’s stance leans toward minimal policy divergence in the upcoming year, although the risks suggest the Bank may pivot to a looser stance before the Fed.
Our Take:
For homeowners, buyers, and sellers in the real estate market, the divergence between the Bank of Canada and the Federal Reserve could signal significant shifts. Potential policy disparities might influence interest rates, impacting borrowing costs and currency valuation. While divergence remains uncertain, the outcome may affect housing markets, mortgage rates, and overall investment sentiment. Keeping an eye on this economic evolution is crucial for navigating the dynamic real estate landscape.
For more information read the recent Better Dwelling article or call us to find out what this means for you!