The Bank of Canada announced on Wednesday that it will keep its overnight rate unchanged at 4.5% for the second time in a row.
The latest consumer price index report shows Canadian inflation has slowed to 5.2%, the lowest level in more than a year. Canadian bond yields have also fallen, suggesting the market is betting on future rate cuts. But even as inflation continues to fall, economists are divided on when interest rates will eventually fall.
Sal Guatieri, senior economist and director at BMO Capital Markets, said he doesn’t expect a rate cut until “early next year.”
“If the economy weakens further, which means we see a real recession, yes, the Bank of Canada will almost certainly act in reverse gear and cut interest rates,” he told the CTV news channel on Wednesday. “But it doesn’t look like it. We’ll only see a very mild recession and a resumption of growth by the end of the year.”
Guatieri said the BMO predicted a “technical recession in the next few quarters” rather than a sharp recession that would be “very gradual and very shallow” and would end by the end of the year. said to expect.
“Canada has a somewhat mixed view of whether it will go into recession. Common forecasts are for continued growth and very moderate growth for the rest of the year. is a quarter or a half, which could meet the technical definition of a recession,” he said.
Meanwhile, Randall Bartlett, Senior Director of Canadian Economics at Desjardins Economics, said: Bank of Canada could cut rates ‘as early as year-end’ Given how quickly inflation is decelerating and how some US banks ran into trouble last month.
“Most importantly, inflation has fallen faster than banks had previously expected and financial conditions are tightening against the backdrop of turmoil in the banking sector outside the border,” he wrote in a research note on Wednesday. “These combined seem to have outpaced the sustained strength of the Canadian economy and labor market.”
The Canadian job market also remains strong. In its last Labor Report, StatCan reported that Canada gained 35,000 jobs for her while the unemployment rate remained unchanged at her 5.0%, near a record low.
“Canadian households continue to benefit from government financial support with a job market at full employment. The combination has reignited consumer spending throughout the first quarter of this year. because it is in conflict with “As the year progresses, we may be able to forestall the necessary subside in price pressures.” TD economists wrote in a research note on Thursday.
Economists also said a “certain relaxation in the job market and erosion of economic momentum” would be required for the rate cut to take place.
“This brings the timing closer to the end of 2024 or early 2024, meaning that just as rate hike cycles have begun in Canada and the US, rate cut cycles will do as well,” they wrote.
Asked if a rate cut was imminent, Bank of Canada Governor Tiff Macklem told reporters that the rate cut expected by bond markets “doesn’t seem like the most likely scenario.” did not rule out the possibility. Future rate hikes to bring inflation down to 2% he said.
Despite Mackrem trying to quell market speculation that a rate cut is imminent, Derek Holt, head of capital markets economics at Scotiabank, said: The Bank of Canada’s own projections of inflation returning to 2% in the medium term underpin the bets on rate cuts.
“By showing that the BoC almost magically returns to 2% inflation within its medium-term horizon, it shows that it has full control over inflation, even when it clearly does not. We don’t think the market will price in a rate cut from a more restrictive level than neutral,” Holt wrote in a research note on Wednesday.
