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Sticky inflation to push Bank of Canada rate cuts to at least June: economists

A majority of economists believe stubborn inflation is likely to delay the first Bank of Canada rate cut until at least June.

Bank of Canada rate outlook 2024

A majority of economists believe stubborn inflation is likely to delay the first Bank of Canada rate cut until at least June.

Markets had previously priced in rate cuts as early as the Bank of Canada’s March or April monetary policy decision meetings due to stalled economic growth and inflation’s steady downward trajectory.

But a rise in both headline and core inflation measures in December has pushed rate-cut expectations further into the year.

A Reuters poll of 34 economists found that two thirds, or 22 of the 34, expect the Bank of Canada’s first rate cut to be in June or later. Meanwhile, all were unanimous that the Bank would hold its benchmark rate at 5.00% this week, where it’s been since July.

“Rate cuts are very likely in 2024, but the Bank of Canada is going to remain as patient as possible for inflation and inflation expectations to retreat further,” wrote BMO’s Benjamin Reitzes.

“Following three years of well-above-target inflation, the last thing policymakers want to do is ease policy too early and allow inflation to re-accelerate,” he added.

However, not everyone thinks borrowers will have to wait that long before the Bank delivers some rate relief. ING economists say high interest rates are “biting” both consumers and businesses.

“As such, inflation looks set to soften further in coming months and so we favour rate cuts from the second quarter onwards, most likely starting in April,” they wrote.

What the forecasters are saying…

Here’s a look at what some economists are saying ahead of Wednesday’s Bank of Canada rate decision.

On inflation:

  • RBC: “The most likely trajectory for inflation going forward is still lower. Although the BoC’s preferred core measures looked worse in December, the share of the consumer price basket seeing unusually high inflation over the last three months continued to shrink. And a disproportionate share of price growth overall is coming from a surge in mortgage interest costs that is a direct result of earlier interest rate increases. An increasingly soft economic backdrop underpinned by slowing consumer demand, declining per-capita GDP, and higher unemployment offers good reasons to expect the broader downtrend in inflation readings to persist.”
  • BMO: “There’s no denying there’s been progress on bringing inflation lower; however, it’s also clear that there’s still plenty of work to do in order to get back to 2%.” (Source)
  • Scotiabank: “We are more concerned about upside risks to inflation in Canada relative to the United States given the problematic pace of wage gains in Canada. The Bank of Canada will have a lower threshold for further deviations away from the 2% target than the Federal Reserve. As a result, we remain of the view that over the next few meetings, the risks are greater that the Bank of Canada will tighten interest rates further rather than cut more rapidly.” (Source)

On rate-cut expectations:

  • Scotiabank: “The latest inflation evidence continues to push back against market pricing and some forecasters’ views that the Bank of Canada will be cutting by the March and April meetings. March has been mostly wiped out and April’s cut pricing was further reduced.” (Source)
  • ING: “Canadian core inflation came in hotter than expected in December and rules out the Bank of Canada shifting meaningfully in a dovish direction at the January policy meeting. However, higher interest rates are biting…As such, inflation looks set to soften further in coming months and so we favour rate cuts from the second quarter onwards, most likely starting in April.” (Source)

On the BoC rate statement:

  • Desjardins: “Much of what’s left driving above-target inflation is attributable to shelter, which in turn is being driven by high interest rates. Excluding shelter, inflation is now running at 2.4%, down from 6.0% in December 2022…In determining whether to emphasize the progress on inflation excluding shelter or the stickiness in the core median and trim measures, Governing Council will effectively be communicating whether or not the door is open to rate cuts in upcoming months.”
  • Dave Larock: “I think the BoC will acknowledge the encouraging progress toward restoring price stability. I also expect the Bank to adopt hawkish language to push back against the bond market’s expectations of the first rate cut in April and a total of four 0.25% cuts in 2024.” (Source)
  • National Bank: “In December’s rate statement, policymakers said that recent growth and labour market data ‘suggest the economy is no longer in excess demand.’ Since then, there’s been nothing that would materially change that assessment and near term growth forecasts may be revised down in an updated MPR…One source of optimism for businesses is expectations for lower rates later this year. Governing Council may want to avoid pulling a rebound forward and therefore, will probably retain a hiking bias and push back on spring rate cut expectations.”

On a spring housing market surge:

  • Scotiabank: “As the expected decline in rates approaches, there is a chance that we see a repeat of the housing rebound seen in spring 2023 following the Bank of Canada’s rate pause. We are not forecasting this, but there does appear to be a meaningful probability that the spring housing market could rebound sharply if households act on pent-up demand for housing.” (Source)

The latest big bank rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parentheses.

Current Target Rate:Target Rate:
Year-end ’24
Target Rate:
Year-end ’25
5-Year BoC Bond Yield:
Year-end ’24
5-Year BoC Bond Yield:
Year-end ‘25
BMO5.00%4.00%NA3.20% (-45%)NA
NBC5.00%3.25% (-75bps)2.75% (-25bps)2.60% (-75bps)2.85%
TD5.00%3.50%2.25%2.85% (-45bps)2.60%
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Last modified: January 22, 2024

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.