In a captivating dance of economic projections, it appears that the first-rate cut from the Bank of Canada is set to be a delayed affair, with a majority of economists betting on at least June to roll out the interest rate red carpet.
Initial expectations had flirted with the idea of rate cuts as early as the Bank’s March or April monetary policy meetings, courtesy of a dance between stalled economic growth and inflation’s graceful descent. However, the economic tango took an unexpected twist as both headline and core inflation measures decided to showcase their moves in December, shoving rate-cut aspirations further down the calendar.
A riveting Reuters poll, featuring 34 economists as its star performers, unveiled a climax where two-thirds, or 22 of the 34, anticipated the Bank of Canada’s inaugural rate cut to make its grand entrance in June or beyond. Meanwhile, there was unanimous agreement among the economic virtuosos that the Bank would keep its benchmark rate steady at 5.00% during the week, a spot it’s been holding since July, like a seasoned performer stealing the spotlight.
BMO’s Benjamin Reitzes, the economic maestro, penned a note assuring that rate cuts in 2024 are on the horizon, but the Bank of Canada, like a patient conductor, plans to let inflation and its expectations retreat gracefully before making its move. He emphasized the Bank’s reluctance to repeat the mistakes of easing policy too early, potentially allowing inflation to stage a comeback after three years of an above-target performance. Yet, in this economic theater, not everyone is convinced that borrowers will be tapping their toes impatiently for that long. The cheeky economists at ING threw in a plot twist, declaring that high-interest rates are currently “biting” both consumers and businesses. Their prediction? Inflation is poised to take a softer turn in the coming months, paving the way for rate cuts to grace the stage from the second quarter onward, with the curtain possibly lifting in April.
Let’s eavesdrop on what the economic soothsayers are murmuring:
On the Inflation Drama:
RBC paints a picture of a lower trajectory for inflation, with a spotlight on the problematic surge in mortgage interest costs. Despite the BoC’s preferred core measures taking a hit, the overall proportion of the consumer price basket experiencing unusually high inflation continues to shrink. The economic backdrop, with its slowed consumer demand, declining per-capita GDP, and higher unemployment, provides a compelling argument for the persistence of the broader downtrend in inflation readings.
BMO adopts a pragmatic stance, acknowledging progress in bringing inflation lower but cautioning that there’s still a substantial amount of legwork needed to return to the coveted 2%.
Scotiabank raises its eyebrow at potential upside risks to inflation in Canada, citing wage gain issues. They anticipate a lower threshold for deviations from the 2% target by the Bank of Canada compared to the Federal Reserve, suggesting that rate tightening might be a more likely move in the near future.
On Rate-Cut Expectations:
Scotiabank delivers a reality check, noting that the latest inflation evidence is pushing against market expectations and some forecasters’ visions of a Bank of Canada cut in March and April. The once vivid picture of March and April rate-cut dreams is now looking more like a faded Polaroid.
ING spices things up, pointing out that while Canadian core inflation heated up unexpectedly in December, higher interest rates are taking a toll. With the anticipation that inflation will cool down in the coming months, they place their bets on rate cuts taking center stage from the second quarter, possibly stealing the limelight in April.
On the BoC Rate Statement:
Desjardins sets the stage, emphasizing that what’s driving above-target inflation is mostly shelter-related. Excluding shelter, inflation has taken a step down from the December 2022 peak. The Governing Council’s decision on whether to focus on progress in inflation excluding shelter or the stickiness in core median and trim measures will be a crucial communication on whether the door is open for upcoming rate cuts.
Dave Larock, the economic oracle, predicts that the Bank of Canada will acknowledge encouraging progress toward restoring price stability. However, he anticipates a more hawkish language to counter the bond market’s expectations of an imminent rate cut in April and a total of four 0.25% cuts in 2024.
National Bank joins the conversation, pointing out that recent growth and labor market data suggest the economy is no longer in excess demand. With optimism brewing for lower rates later in the year, the Governing Council might retain a hiking bias and push back against premature spring rate-cut expectations.
On a Spring Housing Market Surge:
- Scotiabank throws a wildcard into the deck, suggesting that as the expected decline in rates looms, there’s a chance we might witness a replay of the housing rebound from spring 2023 following the Bank of Canada’s rate pause. While they don’t predict it, there’s a noticeable probability that the spring housing market could make a dazzling comeback if households unleash their pent-up demand for housing.
Now, let’s peek at the crystal balls of the Big 6 banks:
Current Target Rate:
- BMO: 5.00%
- CIBC: 5.00%
- NBC: 5.00%
- RBC: 5.00%
- Scotia: 5.00%
- TD: 5.00%
Target Rate – Year-end ’24:
- BMO: 4.00%
- CIBC: 3.50%
- NBC: 3.25% (-75bps)
- RBC: 4.00%
- Scotia: 4.00%
- TD: 3.50%
Target Rate – Year-end ’25:
- BMO: NA
- CIBC: 2.50%
- NBC: 2.75% (-25bps)
- RBC: 3.00%
- Scotia: 3.25%
- TD: 2.25%
5-Year BoC Bond Yield – Year-end ’24:
- BMO: 3.20% (-45%)
- CIBC: NA
- NBC: 2.60% (-75bps)
- RBC: 3.30%
- Scotia: 3.50%
- TD: 2.85% (-45bps)
5-Year BoC Bond Yield – Year-end ’25:
- BMO: NA
- CIBC: NA
- NBC: 2.85%
- RBC: 3.20%
- Scotia: 3.50%
- TD: 2.60%
And so, the economic drama unfolds, with economists and banks playing their respective roles in this intricate performance. As we eagerly await the next act in the Bank of Canada’s monetary policy play, the only certainty is the uncertainty that continues to waltz through the financial landscape.
