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Bank of Canada rate outlook 2024

Economists predict June rate cut as inflation continues to ease

Today’s lower-than-expected inflation reading for February has bolstered confidence that the Bank of Canada could initiate its first rate cut in June.

Market odds of a quarter-point cut to the Bank’s overnight target rate rose slightly to 75% following today’s report from Statistics Canada showing headline inflation continued to ease to 2.8% from 2.9% in January.

This reading matches the lowest inflation rate since early 2021, prior to the surge in prices that led to a peak headline inflation of 8.1% in the summer of 2022.

The Bank of Canada’s preferred measures of core inflation, which strip out food and energy prices, also came in lower than expected, with CPI-median easing to 3.1% (from 3.3% in January) and CPI-trim falling to 3.2% from 3.4%.

Once again, shelter costs continued to rise and remain the leading upward driver of inflation, with its pace picking up to an annualized +6.5% from +2% in January. Rent inflation edged up to 8.2% year-over-year (from 7.8%) while mortgage interest costs eased slightly to 26.3% from 27.4%.

A rate cut could come sooner, or it could come later

While a consensus among economists points to June for the Bank of Canada’s first rate cut, others caution against risks that could impact this timeline.

As Bank of Canada Governor Tiff Macklem has said previously, the Bank wants to see a sustained downtrend in inflation before it would be ready to consider easing interest rates.

“…you don’t want to lower them until you’re convinced…that you’re really on a path to get [to the 2% target], and that’s really where we are right now,” he said last month.

And while the January and February inflation reports are encouraging, they’re not yet enough to satisfy the BoC.

“Two months is not anywhere near a sustained trend, although it is the start of the trend,” mortgage broker and former investment banker Ryan Sims wrote in a post to subscribers. “If we saw this gradual drop from 3.35%, down to 3.15%, down to 3.02%, down to 2.85%, etc., etc., then Tiff and Co. would have reason to believe it is sustained.”

In a new forecast released today, TD Economics said the “battle isn’t won yet” on inflation, and as a result expects the Bank to leave rates on hold until its July meeting.

At the same time, BMO’s Douglas Porter noted that an earlier move by the central bank can’t be dismissed either.

“April still seems too early to be pulling the trigger on rate cuts, though it can’t be entirely ruled out if the Business Outlook Survey shows even more [inflation] progress,” he wrote. “At a minimum for [the April 10 meeting], look for the Bank to open the door to rate cuts.”

Risks of the BoC waiting too long before cutting rates

Just as the Bank of Canada runs the risk of cutting rates too soon, which could stoke demand—specifically real estate demand—and put upward pressure on inflation, experts say a prolonged high interest rate environment could lead to a more significant economic downturn.

“Today’s data reflect the cooling of the Canadian economy over the last six quarters, during which the monetary policy transmission took place,” wrote National Bank economists Matthieu Arseneau and Alexandra Ducharme.

Due to the lagged impact monetary policy has on the economy, they say today’s current “restrictive” level of interest rates is likely to continue putting downward pressure on inflation in the coming months.

“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they added.

Oxford Economics, which has previously suggested Canada’s economy is already in a mild recession, reiterated that belief today.

“Unlike the Bank of Canada, which expects a soft landing, we believe Canada is amid a modest downturn that will increase slack in the economy,” it said. “Alongside our forecast for lower global oil and world food prices this year, this will help slow headline CPI inflation to the 2% target by late 2024.”

Nevertheless, the Bank of Canada anticipates it will take longer for inflation to revert to its 2% target, projecting a return by 2025 according to its latest Monetary Policy Report from January.