Written by 7:51 AM Bank of Canada, Interest Rates Views: 30

Rate cuts are on the way, but not this week, economists say

Economists expect a more dovish tone from the Bank of Canada when it unveils its interest rate decision on Wednesday.

Bank of Canada rate cut forecasts

With inflation easing and the economy slowing under the weight of high interest rates, economists expect a more dovish tone from the Bank of Canada when it delivers its interest rate decision on Wednesday, but no rate cut just yet.

The Bank of Canada is widely expected to leave its overnight target rate unchanged at 5.00%, where it’s been since July, though expectations are rising that interest rate cuts are mere months away.

Bond markets see June as the most likely timing of the Bank’s first rate cut. While the exact month may be in question, economists are in agreement that rate easing will take place over the second half of the year.

Forecasts from the big six banks (see table below) expect anywhere from 100 to 150 basis points worth of rate cuts by the end of the year, which would bring the overnight rate to somewhere between 3.50% and 4.00%.

“Considering our outlook for the rest of the economy (flat-to-negative growth, a rising unemployment rate), cuts at every meeting in H2 are entirely reasonable,” National Bank Financial wrote in a recent report. “And while not contained in our base case outlook, one should also factor in the risk of 50 bps cuts along the way, given today’s above-neutral setting.”

Despite easing inflation, Bank of Canada to remain cautious

While the larger-than-expected dip in inflation in January is encouraging, economists say—and the bank itself has said in the past—that it will want to see a more sustained downtrend before it starts to seriously entertain interest rate cuts.

Headline inflation fell to 2.9% in January against expectations of a 3.3% reading, and was down from December’s 3.4% pace.

“January’s much softer-than-expected CPI report may warrant acknowledgement in [Wednesday’s] press release, but don’t expect them to play up a single month of data too much,” economists from National Bank Financial wrote.

Meanwhile, there are growing signs that the economy is struggling under the weight of high interest rates.

Despite a higher-than-expected GDP growth rate of 1% in the fourth quarter—against expectations that growth would be flat—economists say the underlying details are still weak and that all of the growth in the quarter came from net exports.

“Domestic consumers and businesses on the other hand continued to pull back spending and investment activities. GDP growth was, again, slower on a per capita basis as population growth outpaced output for a sixth consecutive quarter,” economists from RBC Economics wrote.

While there are “clear signs that tighter monetary policy is working,” economists at National Bank say getting inflation back to target will remain the Bank’s number one concern. “Above-target inflation and sticky wage pressures will still leave the Bank of Canada unwilling to contemplate lowering interest rates in the near-term,” they noted.

What the experts are saying…

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

On inflation:

  • Dave Larock: “Although the BoC will be encouraged by our latest CPI data, I think it will remain cautious for the time being because it has consistently hinted that it prefers to err on the side of overtightening. The Bank will also want to see how that continued disinflation is impacting business and consumer expectations. There is good reason to believe that inflation will continue to slow in the months ahead.” (Source)
  • Oxford Economics: “While recognizing that past rate hikes have eased inflationary pressures, the BoC believes more time is needed to restore price stability.”

On rate-cut expectations:

  • RBC Economics: “A strong start to 2024 for labour markets gives the BoC more leeway to wait for firmer signs that inflation is getting back under control before pivoting to interest rate cuts. As of now, our base case assumes the BoC starts to lower interest rates around mid-year.”
  • National Bank Financial: “April now appears to be too premature for the first BoC rate cut. June may be a more viable timeframe, although even that delayed rate call hinges on receipt on some marginally dovish data…We now assume 125 bps of rate cuts from the BoC this year, the overnight target rate ending 2024 at 3.75%. The policy rate could approach 3% in the first half of 2025, but again we stress that the way forward for the BoC is uncertain, with the central bank’s own assessment of potential needing to be clarified.”

On the BoC rate statement:

  • Desjardins: The Bank of Canada “is likely to sound at least somewhat more dovish relative to the January rate announcement. While GDP data have modestly exceeded the central bank’s projections, the details show that the domestic economy is anything but healthy. Most importantly, inflation has cooled more than the Bank of Canada’s forecast. That should allow policymakers to present a more balanced statement.”
  • RBC Economics: “Over past meetings, the BoC has been gradually and cautiously moving towards a more dovish stance. Language around the need to hike rates further was already dropped in January and is unlikely to reappear in the statement next week. The central bank will instead continue to highlight softening in aggregate demand while reiterating that inflation pressures, although easing are still a risk.” (Source)
  • National Bank Financial: “Governor Macklem will likely stress that one good month of inflation data doesn’t make a trend and thus, it’s (still) not yet time to talk about rate cuts. Memories of last spring’s housing market surge are another factor that may leave the BoC reluctant to say anything to loosen financial conditions.”

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
CIBC5.00%3.75% (+25bps)2.75% (+25bps)NANA
NBC5.00%3.75% (+50bps)2.75%2.95% (+35bps)2.90% (+5bps)
RBC5.00%4.00%3.00%2.90% (-40bps)3.00% (-20bps)
Scotia5.00%4.25% (+25bps)3.00% (-25bps)3.50%3.50%
TD5.00%3.50%2.25%2.85% 2.60%
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Last modified: March 5, 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.