As most analysts expected, the Bank of Canada cut overnight interest rates by 25 basis points, the first rate cut in four years, which will come as good news for farmers with variable or floating rate loans.
“Further and sustained evidence that inflation is moderating indicates that monetary policy no longer needs to be as tight,” Bank of Canada Governor Tiff Macklem said in a statement.
The Bank of Canada’s move has analysts and currency hedgers calculating the likelihood of further rate cuts from the bank in 2024.
JP Gervais, chief economist at Farm Credit Canada, said two more rate cuts are possible before the end of the year. “The Bank of Canada has not been very forthcoming about the direction of future rate cuts. The direction of policy rate cuts will influence interest rates for the rest of the year. Any signs of further economic weakness or declining inflation could lead to lower interest rates across the market,” Gervais said.
Today’s decision and upcoming rate cuts will provide farmers with some relief in the borrowing costs of variable rate loans.
In April 2024, of farmers who said they expect their future farm financial performance to be worse than 12 months from now, 25% cited borrowing costs as their first or second reason.
Positively for exporters, the Bank of Canada will raise interest rates before the Federal Reserve does, which will cause the Canadian dollar to weaken against the US dollar.
Gervais’ analysis of the strength of the US Dollar (USD) states: “The US Dollar is at its strongest level in the last 20 years, not just relative to the Canadian Dollar, but all other currencies. If the Fed starts to cut rates, whatever the timing and pace, it will likely put downward pressure on the US Dollar, all else being equal. Thus, while the Canadian Dollar may come under pressure in the near term, we cannot rule out a recovery towards the end of the year, supported by a strengthening Canadian current account.”
As of 2:30pm ET on Wednesday, CAD/USD was trading at 0.73026, down 0.13%, with an intraday low of 0.72225.
