BoC predicted to hold interest rate at 5 per cent Wednesday, but could consider rate cuts starting next year
The rate hikes are almost certainly done — but don’t count on any cuts just yet.
The Bank of Canada is likely to stand pat in its final interest rate announcement of the year Wednesday morning, leaving its key overnight lending rate at 5 per cent, economists and markets agree.
But with the Canadian economy grinding to a halt, and inflation slowing substantially, could the Bank finally be considering a rate cut early next year? It’s a possibility, but not a lock, argued RBC economists Nathan Janzen and Claire Fan in a research note. After 10 rate hikes since March 2022, the Bank isn’t about to start racing in the other direction.
“While we’re expecting a dovish lean from the BoC relative to past interest rate decisions … we don’t see the BoC rushing to cutting rates,” wrote Janzen and Fan, who don’t expect the Bank to start trimming rates until the third quarter of 2024.
Recent data has pointed to a slowing economy, said CIBC chief economist Avery Shenfeld. That, says Shenfeld, makes the idea of another interest hike a non-starter for Bank governor Tiff Macklem. Another hike, said Shenfeld, would risk putting Canada’s economy into a recession.
“No reason to expect that interest rates will budge”
“If the Governor wants to stick to his view that a recession won’t be necessary to get to a two per cent CPI, he can’t add interest rate pressure to an economy that has already shown zero average growth in the prior two quarters,” Shenfeld wrote in a report. “It’s almost easy to forget that the central bank has a rate decision to announce, because there’s absolutely no reason to expect that interest rates will budge at this point.”
In the third quarter, Canada’s economy shrank at an annualized rate of 1.1 per cent, Statistics Canada announced recently. And in October, the country’s annual rate of inflation dropped to 3.1 per cent, down from 3.8 per cent in September.
While that’s well below the 8.1 per cent inflation peaked at in June 2022, it’s still above the Bank’s two per cent target.
In March 2022, the Bank of Canada began an aggressive rate-hike campaign in a bid to drive inflation down to its target of two per cent. Before the campaign, the bank’s key overnight lending rate sat at 0.25 per cent. Now, it’s at 5 per cent, its highest in 22 years.
The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving prices down and slowing the economy. The reverse is also true, according to standard economic theory: Rate cuts make it likelier for consumers and businesses to spend money, making the economy grow more quickly.
April may be the earliest for cuts
Trading on the overnight interest swaps market is pricing in a 50 per cent chance of a rate cut in March, but that’s a little sooner than the Bank is likely looking at, said Taylor Schleich, director of economics at National Bank Financial.
“We tend to think April is the earliest they’re likely to cut and June is perhaps a bit more realistic,” Schleich wrote in an email.
In a report, Schleich and his colleague Warren Lovely predicted the Bank will likely pat itself on the back Wednesday, and hint that maybe, just maybe, that it’s done raising rates.
“Look for the Bank to reiterate that higher rates are working to slow demand and ease inflation,” Schleich and Lovely wrote. “We might also see the statement explicitly state there is evidence that ‘rates may now be restrictive enough,’ as Macklem remarked in a November speech.”
The Bank is dead-set that inflation needs to get back to two per cent, and be entrenched there for a while, argued Benjamin Reitzes, an interest rate and macroeconomic strategist at BMO.
“Maintaining (or regaining) credibility is key for the BoC,” Reitzes wrote “and that is expected to keep them talking tough on inflation until most everyone is convinced inflation is durably headed back to target.”
This article was reported by The Star
