Market participants still expect the first Bank of Canada rate cut in April
Despite push-back from the Bank of Canada against aggressive rate-cut predictions, a majority of influential economists and analysts still expect rates to start falling by April.
That’s according to the Bank of Canada’s latest quarterly Market Participants Survey, which consists of a questionnaire sent to 30 influential financial market participants.
Based on the median survey results, the participants expect the Bank of Canada to cut its policy rate by 25 basis points starting in April, followed by another 75 bps by December.
That would bring the Bank’s overnight target rate down to 4.00% from its current level of 5.00%.
The survey respondents also see the Bank continuing to cut rates by another full percentage point in 2025, bringing its overnight rate to 3.00%.
These forecasts are unchanged from the Bank’s third-quarter survey results. The latest results are based on questionnaire responses that were completed by key market participants between December 18 and 19, the same week Macklem said it was too soon to talk about monetary policy easing.
“I know it is tempting to rush ahead to that discussion,” he said at the time. “But it’s still too early to consider cutting our policy rate.”
More recently, Macklem told the House of Commons finance committee last week that even though monetary policy deliberations have shifted from “whether monetary policy is restrictive enough, to how long to maintain the current restrictive stance,” the Bank remains hesitant to start cutting rates prematurely.
“We’ve made a lot of progress [on getting inflation down] and we need to finish the job,” he said.
Stronger-than-expected GDP growth in November—and forecasts for sustained growth in December—have also eased pressure on the Bank of Canada to start cutting rates in the near term, allowing it to focus on ensuring inflation continues trending back towards the Bank’s 2% target.
Respondents optimistic about inflation
On the inflation front, survey respondents are optimistic that the Bank will be able to achieve its goal of near-2% inflation by later this year.
Based on the median survey results, the market participants expect headline inflation will fall to 2.3% by the end of 2024 and 2.1% in 2025. That’s more optimistic than the Bank of Canada’s current forecasts, which is that inflation will reach 2.8% by the end of the year before falling to 2.2% in 2025.
The respondents were in line with the Bank’s own forecasts for economic growth, with most expecting real GDP growth of 0.8% by the end of 2024, although that’s down from 1% in the Q3 survey.
They identified a weaker housing market as the top downside risk to that growth outlook, followed by tighter financial conditions and lower commodity prices.
Increased recession odds in the next six months
The survey also found that a median of experts put the odds of a recession in the next six months at 48%, up from 40% in the previous survey. However, recession odds in the next six to 12 months fell to 40% from 48% in the Q3 survey.
Some economists have forecasted an imminent recession in 2024, while others believe the economy is technically already in one.
Economists from Desjardins say they expect the country to enter a recession within the first half of this year. “Even if we ultimately determine that Canada as a whole was not in recession in 2023, we think it will be soon,” they noted.
Others, like Oxford Economics, argue Canada is already in the midst of a recession, with a more substantial economic downturn as the year progresses.
“We believe Canada slipped into a recession in Q3 that will deepen and endure well into 2024 as the full impact of past interest rate hikes materializes,” economists Tony Stillo and Cassidy Rheaume wrote in a recent research note.