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A rate cut is on the way, but not this week, economists say

With inflation and the economy reeling under the weight of high interest rates, economists are expecting a hawkish tone from the Bank of Canada when it unveils its interest rate decision on Wednesday, but no rate cut yet.

The Bank of Canada is expected to leave its target overnight rate unchanged at 5.00%, where it has been since July, although expectations are rising that a rate cut is still months away.

Bond markets see June as the most likely time for a rate cut by the Bank. Although it may be a month away, economists agree that the rate cut will happen in the second half of the year.

Forecasts from the six major banks (see table below) expect any rate cut from 100 to 150 by the end of the year, which would bring the overnight rate somewhere between 3.50% and 4.00%.

“If we take into account the way we look at the economy as a whole (slow to negative growth, rising unemployment), the decrease in all H2 meetings is completely reasonable,” National Bank Financial wrote in a recent report. “And while it’s not in our baseline view, one should also risk 50 bps cuts down the road, given today’s neutral stance.”

Despite reducing inflation, the Bank of Canada must remain vigilant

While higher-than-expected inflation in January is encouraging, economists say—and the bank itself has said in the past—that it will want to see a sharp decline before it starts entertaining interest rate cuts.

Headline inflation eased to 2.9% in January compared to expectations for a reading of 3.3%, and down from 3.4% in December.

“The softer-than-expected January CPI report may warrant approval [Wednesday’s] press release, but don’t expect them to overplay one-month data,” National Bank Financial economists wrote.

Meanwhile, there are growing signs that the economy is struggling under the weight of high taxes.

Despite a higher-than-expected 1% GDP growth rate in the fourth quarter—contrary to expectations that growth would be flat—economists say fundamentals are still weak and that all of the quarter’s growth came from net sales.

“Household consumers and businesses, on the other hand, continued to withdraw spending and investment. GDP growth has also slowed per capita as population growth outpaced output for the sixth consecutive quarter,” wrote RBC Economics economists.

Although there are “clear signs that the tightening of monetary policy is working,” economists at the National Bank say that returning inflation to target will remain the Bank’s concern. “Inflation targets and sticky wage pressures will still leave the Bank of Canada reluctant to consider lowering interest rates in the near term,” they noted.

Here’s a look at what some economists are saying ahead of Wednesday’s decision by the Bank of Canada.

For inflation:

  • Dave Larock: “While the BoC will be encouraged by our latest CPI data, I think it will remain cautious for now as it has consistently said it prefers to err on the side of over-tightening. The Bank will also want to see how that continued inflation affects businesses and consumer expectations. There is good reason to believe that inflation will continue to moderate in the coming months.” (Source)
  • Oxford Economics: “While recognizing that recent rate hikes have eased inflationary pressures, the BoC believes more time is needed to restore price stability.”

In anticipation of the downgrade:

  • RBC Economics: “A strong start to 2024 for labor markets gives the BoC more leeway to wait for stronger signs that inflation is coming back under control before turning to interest rate cuts. As of now, our base case assumes that the BoC starts lowering interest rates within a year. “
  • National Bank Financial: “April now seems too early for the first BoC rate cut. June may be a more active period, although even that delayed rate hike depends on the reception of some unclear data…We now assume a 125 bps rate cut from the BoC this year, with the target overnight rate ending in 2024 at 3.75%. The policy rate could reach 3% in the first half of 2025, but we also stress that the BoC’s path forward is uncertain, as the central bank assesses the possibility of clarification.”

In the BoC rate statement:

  • Desjardins: The Bank of Canada “might sound at least sad about the January rate announcement. Although the GDP data modestly exceeded the central bank’s estimates, the data shows that the domestic economy is not healthy. Most importantly, the inflation has fallen more than the forecast of the Bank of Canada. That should allow the makers of policy to present a balanced statement.”
  • RBC Economics: “In past meetings, the BoC has been moving slowly and cautiously towards a tighter stance. Language about the need to raise rates was already dropped in January and is unlikely to reappear in next week’s statement. The central bank will instead continue to highlight the softening of aggregate demand while reiterating that inflationary pressures, although tapering remains a risk. ” (Source)
  • National Bank Financial: “Governor Macklem may insist that one good month of inflation data has not changed, so, (we cut) time to talk about reducing rates.” The memory of the housing market boom last spring is another factor that could leave the BoC reluctant to say anything to ease monetary conditions.”

The latest central bank rate forecasts

Following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes to their previous forecasts in parentheses.

Current Target Level: Target Level:
End of year ’24
Target Level:
The end of the year ’25
5-Year Bond Yield:
End of year ’24
5-Year Bond Yield:
End of year ‘25
BMO 5.00% 4.00% 3.00% 3.20% 2.95%
CIBC 5.00% 3.75% (+25bps) 2.75% (+25bps) NA NA
NBC 5.00% 3.75% (+50bps) 2.75% 2.95% (+35bps) 2.90% (+5bps)
RBC 5.00% 4.00% 3.00% 2.90% (-40bps) 3.00% (-20bps)
Scotland 5.00% 4.25% (+25bps) 3.00% (-25bps) 3.50% 3.50%
TD 5.00% 3.50% 2.25% 2.85% 2.60%

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