Some of Canada's top economists give their view of what's to come
The Bank of Canada will be closely watched this week as its policy committee make their next interest rate decision along with a statement and press conference.
It would go against consensus to anticipate any change in the central bank’s current overnight rate, which has been on hold since July 2023, so the most interesting elements of decision day this Wednesday will be the tone around forward-looking policy.
But do economists from Canada’s leading financial institutions believe there is any scope for a surprise cut in interest rates this week?
“No change is expected to the policy rate. Nothing is priced in markets and no one in consensus expects any change,” wrote Scotiabank vice president and head of Capital Markets Economics, Derek Holt in a commentary.
Benjamin Reitzes, managing director, Canadian Rates & Macro Strategist, Fixed Income Strategy, at BMO agrees, adding that he is also not expecting any change in the BoC’s quantitative tightening, or any real policy change from what was said in December.
He believes that the BoC will highlights concern about inflation following recent CPI data and suggests that rate cuts will not be realistic until inflation is closer to the 2% target, likely to be mid-year at the earliest.
RBC Economics’ Nathan Janzen and Claire Fan are also dovish on rate cuts.
“The statement and press conference that follows will be watched closely for hints about how much longer the central bank expects to hold interest rates at these levels, although we expect the BoC to push back against the idea that a shift to interest rate cuts is coming soon,” they wrote in their forward guidance.
“We expect the first decrease in the overnight rate to come around the middle of this year, and for that to be followed by 75 bps more later in the year to lower the overnight rate to 4% by the end of 2024,” they added.
Economic weakness
At TD Economics, senior economist James Orlando, CFA, notes that signs of weakness in the Canadian economy have sparked expectation that the BoC could begin cutting interest rates in the spring, but he believes this week’s tone may suggest otherwise.
“Importantly, markets believe that this weakness will soon come through in the data. This belief has maintained expectations that the BoC will begin cutting rates by the spring, something that the Bank may try to lean against next week,” he stated.
Desjardins’ managing director and head of macro strategy, Royce Mendes, is not expecting surprises this week either, but adds to the opinion that the BoC will adopt a cautious stance.
“Signalling rate cuts or an end to QT too early risks seeing financial conditions ease aggressively, which in turn could leave inflation lingering above target for longer than central bankers are comfortable with,” he wrote in his outlook. “So, while policymakers have some easy decisions to make on the policy rate and QT [this] week, their communications will set the tone for markets, which have already opened the year in choppy fashion.”
Communication will be key for the BoC, and it will now make press conferences part of every rate decision day.
