The Bank of Canada is widely expected to leave interest rates unchanged this week for the sixth straight meeting.
Instead, economists say they will be watching the central bank’s accompanying statement and its latest Monetary Policy Report, in which it will reveal its updated economic forecasts.
While the Bank is forecast to leave its overnight target rate unchanged at 5.00%, where it’s been since July, markets and economists are growing more confident that the Bank will instead pull the trigger on its first rate cut at its subsequent meeting in June.
Bond markets are currently pricing in an 88% chance of a 25-basis-point rate cut at the June 5 meeting. Those odds increased over the weekend following last week’s March employment report, which saw the country’s unemployment rate jump three tenths of a percentage point to 6.1%.
A CMT poll posted on LinkedIn also found that nearly half of respondents are betting on a June rate cut, with another 30% believing the Bank of Canada will wait until its September 4 meeting, or even later.
However, when the Bank of Canada releases its rate decision Wednesday morning, markets will instead be watching for any changes in language in its statement.
Economists from National Bank expect the statement to acknowledge that some of the Bank’s closely watched indicators, like wage growth, inflation expectations, and corporate pricing bahaviour, have all continued to improve.
“Governing Council could therefore update their ‘forward guidance’ paragraph to reflect recent developments and open the door to easing at future meetings,” wrote Taylor Schleich and Warren Lovely. “Such language may intensify June rate cut bets, but Macklem, in the post-decision press conference, will surely stress that future decisions will be guided by incoming data.”
And on that front, markets will also receive the Bank’s updated economic forecasts in its latest Monetary Policy Report that will be released on Wednesday.
This will include the Bank’s estimate for its neutral rate, which is expected to be revised up at least to a range of 2.25% to 3.25% (mid-point of 2.75%) from its current target range of 2.00% to 3.00% (2.50%).
The neutral rate is defined as the real interest rate that balances the economy at full employment and maximum output, all while maintaining stable inflation, and it’s the BoC’s primary objective to ensure inflation remains within this target range.
While National Bank’s Schleich and Lovely put forth reasons why the target range could be raised by up to 50 bps, they conceded that “central banks tend to favour gradualism, so it may be more likely that a smaller 25-bps adjustment is made.”
“That would bring the estimate back to where it was in 2019, with policymakers likely to flag that risks may be tilted higher still,” they added.
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:
- National Bank: “Simply put, recent inflation data has been encouraging. The BoC has long said they need to see clear downward momentum in core inflation, and one could argue that has arrived. CPI-Trim and -Median are running at 2.2% (on average) over the last three months after hovering between 3% and 5% for a year and a half. 6- and 12-month measures have likewise stepped down.”
- Scotiabank: “Inflation remains a challenge for central banks. We continue to expect a sustained return to inflation targets in 2025. Given the greater economic momentum observed than expected so far this year, along with strong wage growth and risks to supply chains, risks to inflation are tilted to the upside.”
- Desjardins: “The Bank of Canada is at risk of leaving monetary policy restrictive for too long. Before the last rate decision, we argued that the central bank’s preferred measures of core inflation were overestimating the true nature of underlying price pressures. We showed how skewness in the underlying distribution of price changes has caused the central bank’s indicators to become biased upward.”
On rate-cut expectations:
- RBMO: “On balance, the BoC will likely view the overall results [from the March employment report] as pointing to more disinflationary pressure ahead, and will await the next couple of inflation prints, but a June cut is looking a bit more likely now.” (Source)
- Scotiabank: “We remain comfortable with our views that the Bank of Canada will cut in September and that the Fed will cut in July given recent developments. Cuts of 75 basis points are forecast for Canada this year and 100 basis points of cuts are predicted in the U.S. We continue to believe the Fed will cut interest rates more rapidly than the Bank of Canada given overwhelmingly better productivity outcomes in the U.S. Further strength in economic activity, such as a stronger rebound in the Canadian housing market for instance, or upside surprises to inflation could push those rate cuts out further.” (Source)
On the BoC rate statement:
- National Bank: “The rate statement should also note that some of the Bank’s closely watched indicators (wage growth, inflation expectations, corporate pricing behaviour) have continued improving. Governing Council could therefore update their ‘forward guidance’ paragraph to reflect recent developments and open the door to easing at future meetings.”
- Dave Larock: “My bet is that the BoC will surprise markets by maintaining hawkish language, which emphasizes the need to maintain its policy rate until more progress is made. There is little doubt that mortgage rates will eventually start to fall, but I think the market is still too optimistic about when that process will begin.” (Source)
On the labour market
- RBC Economics: “Labour markets still haven’t collapsed in a way that would force the Bank of Canada to react quickly or aggressively with lower interest rates, but a rising unemployment rate and further signs that inflation pressures are broadly consistent with our base-case assumption that the central bank will shift to cuts by mid-year.”
- TD Economics: “[Last week’s] report casts a cloud over the Canadian economy, but it is unlikely to change the Bank of Canada’s (BoC’s) thinking when it meets next week…recent data outside of [the latest] weak employment report has been quite strong. This validated the Bank’s decision to remain patient with the start of rate cuts.” (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 Bond Yield: Year-end ’24 | 5-Year Bond Yield: Year-end ‘25 | |
|---|---|---|---|---|---|
| BMO | 5.00% | 4.00% | 3.00% | 3.25% (+5bps) | 2.95% |
| CIBC | 5.00% | 3.75% | 2.75% | NA | NA |
| NBC | 5.00% | 4.25% (+50bps) | 2.75% | 3.05% (+10bps) | 2.80% (-10bps) |
| RBC | 5.00% | 4.00% | 3.00% | 3.00% (+10bps) | 3.00% |
| Scotia | 5.00% | 4.25% | 3.00% | 3.50% | 3.50% |
| TD | 5.00% | 4.00% (+50bps) | 2.25% | 2.90% (+5bps) | 2.60% |
