Wealth Professional gauges the mood in the room following the latest pause
It was no big surprise when the Bank of Canada announced that it was pausing interest rates at 5%, but what do some of Canada’s sharpest economic minds think will happen now?
Wealth Professional has collated opinion from leading economists as they react to the interest rate decision to determine if they believe rates have now peaked for this cycle.
RBC Economics
Claire Fan from RBC Economics believes that the central bank will not be hiking rates again, given data that is showing cooling of the economy, albeit at a slower pace than policymakers would like.
She notes that energy prices are a key factor in sticky inflation, and this is not something the BoC can control. But the outlook for exports is weakening as the global economy faces challenges and consumer spending is also easing.
“The BoC will be cautious about starting to ease off the monetary policy brakes too quickly - we expect the overnight rate will be held at 5% through the first half of next year, with modest rate cuts to follow starting in Q3 2024,” Fan wrote in her commentary.
CIBC Capital Markets
Avery Shenfeld at CIBC also notes that, while the BoC’s Monetary Policy Report did not suggest a recession, there are clear signals of a slower economy ahead.
While the BoC has expressed concern about price hiking by companies, Shenfeld notes that this will have a ceiling beyond which will restrain increases and likely lead to discounting.
“We'll stick to our view that the Bank of Canada has already delivered enough rate hikes to
keep growth under wraps and bring inflation down on a somewhat faster trajectory than its latest forecasts. That good news on the inflation front, and not so good news for growth, should be sufficient to bring a policy ease towards mid-2024, with overnight rates getting to 3.5% by the end of that year,” he wrote in his analysis.
PIMCO
Tiffany Wilding, economist at PIMCO, is less certain that the BoC is done with tightening.
“Governing Council used the deterioration in growth and the slight reprieve from September’s Consumer Price Index (CPI) report to extend their pause and allow more time for the pass-through from weaker demand to lower inflation to materialize,” she said in a statement supplied to WP. “However, if progress remains stalled around 3.5-4% they may see the need to act further. They remain concerned about elevated near-term inflation expectations adding pressure to wage and price inflation and will likely retain a hawkish bias until overall inflation eases as they seek to avoid stagflation.”
Scotiabank
Derek Holt, head of Capital Markets at Scotiabank, is also cautious about calling for rate cuts.
“We can reduce our policy rate before achieving 2% inflation when we see where it is going. Now is not the time to assess this. For now, we are evaluating whether the policy rate has tightened sufficiently. We need to see clear signs that inflation is going back down to 2% and right now it is too early,” he wrote on the bank’s website.
Holt notes that there are risks including energy prices, supply chain shocks, and geopolitics, that need to be monitored carefully in the months ahead.
TD Economics
James Orlando at TD Economics highlighted the BoC’s statement that it is “prepared to raise the policy rate further if needed.”
With inflationary pressures remaining, and in some cases increasing, and progress to price stability slower than the central bank would like, there could be further pain ahead.
“Although the BoC has painted a clear picture for why it doesn't need to hike again, we expect its hawkish rhetoric to persist. It needs to maintain current tight financial conditions in order to achieve its forecasted slowdown. And while markets are hesitant to build in another hike, the impact of the BoC's rhetoric has resulted in a higher for longer path for the BoC's policy rate,” Orlando wrote in his reaction to the rate decision.
Franklin Templeton Canada
Tom O’Gorman, director of Fixed Income, Franklin Templeton Canada, told Wealth Professional that the current rates environment could ultimately lead to recession.
“We saw consensus that it would be a hawkish-type hold as inflation has been stubborn to come down to the levels that the Bank of Canada are looking for. This takes some of the dovishness out where rates were expected to be cut earlier, which I would expect some of this to get priced out,” he said. “We’ve seen growth slowing, have one of the most levered developed economies in the world, and have seen one of the fastest, most aggressive tightening cycles in modern history. Given this, we expect rates to be higher for longer. I believe we are getting to the point where the rate hikes are going to bite the economy, which will bring us closer to a recession.”
Desjardins
Randall Bartlett, senior director of Canadian economics at Desjardins, has a bearish view on rate cuts and also mentions the R word.
“According to the latest Bloomberg survey, economists expect the Bank to cut by 25 basis points in the second quarter of 2024 on average. We agree with the timing, but our more bearish outlook—which includes a short, shallow recession in the first half of 2024—points of a more rapid pace of rate cuts once the Bank starts down that path,” he said in his commentary.
