Economists delay rate cut predictions following job surge

They now see June as the new target for BoC's policy ease

Economists delay rate cut predictions following job surge

A recent job market data from Statistics Canada has prompted economists to postpone their expectations for interest rate cuts by the Bank of Canada. Initially expecting rate reductions as early as April, experts now forecast the first cut to occur in June, aligning with a broader consensus view on a more stable economic outlook.

The change in forecast comes after January's job market data revealed significant employment growth—the largest in four months—and a decrease in the unemployment rate to 5.7%. Surprising to many, this improvement in labour market conditions suggests a more robust economic environment than previously thought.

Royce Mendes of Desjardins Securities pointed to the recent data as a key factor in revising their interest rate cut expectations, noting the economy might still face challenges, indicated by recent layoffs in major companies. Despite these adjustments, Mendes's firm predicts the Bank of Canada will cut rates by 125 basis points throughout the year, 25 basis points less than the initial forecast.

“The employment data suggests that June is now more likely for the first Bank of Canada rate cut of this cycle than April,” Mendes said in a report to investors.

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Similarly, Stephen Brown and Olivia Cross from Capital Economics believe the strong labour market provides the Bank of Canada with the flexibility to delay rate cuts. They anticipate clearer signs of reduced inflation in housing and other areas by June, which would justify a decision to lower rates.

The current benchmark overnight rate is at 5%, with recent statistics, including a 0.6% rise in hours worked in January, suggesting Canada's economy is not heading towards a recession.

“The strength of the labour market in January is another reason to think that the Bank of Canada can wait a little longer before it starts to cut interest rates,” Cross said in a note. “By then, we should see clearer signs that both shelter and non-shelter inflation has eased.”

Although Matthieu Arseneau from National Bank of Canada also expects a rate cut in June, he considers an earlier cut in April to be more cautious. At the same time, he acknowledges the challenging stagflationary scenario that the Bank of Canada faces, likely influencing its decision to wait.

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