By Jean-Paul McDonald
Farms.com
The agricultural sector faces an evolving economic landscape, especially concerning interest rates. According to FCC Economics, there’s a notable shift in the discussion from rising interest rates to potential decreases.
For those in the agricultural sector, understanding these economic indicators is crucial. 2024 promises a landscape of changing interest rates, impacting everything from loan costs to currency values. This knowledge is vital for farm businesses as you plan for a successful year ahead.
It's expected that we'll see a reduction in the overnight rate by 75 basis points starting in the second half of 2024. This change will likely affect long-term borrowing costs sooner rather than later.
The Consumer Price Index (CPI) in October showed both positive and negative trends. The year-over-year inflation rate dropped to 3.1%, a noticeable improvement. However, core inflation, which offers a more consistent view by excluding volatile elements, remains above the BoC’s 2.0% target. Due to this high core inflation, the overnight policy rate has been maintained at 5.00%.
A decrease in GDP growth in 2024 is anticipated to further reduce inflation. The Bank of Canada is prepared to provide relief, such as easing mortgage rates, as soon as a sustainable decrease in inflation is observed. While the Bank of Canada doesn’t predict reaching its 2.0% inflation target until the end of 2025, FCC Economics believes this will happen sooner.
Financial markets are also adjusting their expectations. As of December 6, they have priced in the first rate cut for June 2024, with a total reduction of 100 basis points in the overnight rate anticipated throughout the year.
Looking at fixed rates, there's been notable volatility in bond market yields, which directly impacts on fixed-rate loan costs. These rates are closely tied to US economic events, so with the Federal Reserve likely ending its rate hikes, both US and Canadian bond yields are expected to decrease.
Initially, this may lead to an inverted yield curve, but a normal curve is predicted to return by the second half of 2025.
The Canadian dollar has also seen significant changes. Despite stable oil prices, the currency has weakened, largely due to the strength of the US dollar. This trend is expected to reverse in the future, providing a potential uplift for the Canadian dollar.