Economists predict a vibrant housing market and federal spending could push rate cuts to fall
The resurgence of the spring housing market may cause the Bank of Canada to reconsider the timing of anticipated interest rate cuts, a scenario outlined by various economists and reported by the Financial Post.
As the central bank approaches its upcoming rate decision this Wednesday, the conversation among economists has shifted, with some suggesting that the combination of a vibrant spring housing market and a stimulative federal budget could delay rate cuts until the fall.
Derek Holt, head of capital markets economics at the Bank of Nova Scotia, voices a strong stance against an early rate cut.
He labels an April reduction as potentially “the dumbest thing the central bank could do,” given the expected vibrancy of the spring housing market alongside a stimulative federal budget that aims to increase spending.
Holt's skepticism extends to a June cut, which he believes is already anticipated by the market and consensus forecasts. He predicts the first rate cut to occur in September, attributing his outlook to a temporary softness in core inflation observed in January, which he expects to rebound.
The perspective that the Bank of Canada might proceed with an April rate cut is based on the assumption that the central bank will overlook shelter price inflation's contribution to keeping consumer price index growth above its two percent target.
Doug Porter, chief economist at the Bank of Montreal, refutes the idea that the central bank will ignore the impact of rising rent and mortgage interest costs on shelter inflation. He argues that overlooking significant household expenses could harm the Bank of Canada's credibility, especially when inflation expectations remain high.
June is viewed as the probable start for rate cuts by Porter, assuming disinflationary trends persist. He anticipates a more dovish tone in the Bank of Canada's March 6 announcement, acknowledging improved inflation figures but not signaling imminent rate cuts.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, points out the lack of suspense for the March 6 announcement, suggesting the Bank of Canada will wait for April's monetary policy report before indicating any significant policy shifts.
The article also touches on Canada's central bank's position compared to the United States Federal Reserve. According to Holt, the Bank of Canada has the advantage of waiting longer to cut rates due to its lower policy rate and undervalued currency.
He cites several factors, such as accelerating wage growth, decreasing productivity, ongoing fiscal stimulus, and high immigration relative to housing market capacity, as reasons for the Bank of Canada's cautious approach to rate cuts.
