Still, the central bank seems in no hurry to bring rates down
With the threat of further rate hikes notably absent from the Bank of Canada’s latest policy rate decision, it now appears virtually certain that cuts are on the way – with the big question how quickly the central bank will begin to trim, according to a leading economist.
Sal Guatieri (pictured), senior economist and director at Bank of Montreal (BMO), told Canadian Mortgage Professional that the language used in the Bank’s opening rate announcement of the year suggested its rate-hiking cycle was now a thing of the past, unless an unforeseen and dramatic economic about-turn takes place.
“The Bank hasn’t ruled out the possibility of a rate increase, but a lot of things would have to go wrong to spur [that],” Guatieri said. “Mainly, inflation would have to stall at these higher levels, or wage growth would have to pick up.
“But barring that, it does seem pretty clear that the Bank of Canada’s next move will be a rate reduction as widely anticipated.”
That shift in tone comes as a welcome tonic for mortgage holders who’ve seen rates skyrocket in recent years and would-be buyers who’ve moved to the sidelines amid the central bank’s tightening cycle. Still, there’s a caveat: rates are set to fall at some point in this year, but the Bank isn’t exactly rushing to get started on its cutting path.
“The other clear message is that the Bank of Canada doesn’t seem very much in a hurry to ease policy,” Guatieri said. “Again, that’s because we’re still seeing stickiness in inflation, mainly in the service sector, mainly in the shelter component – but also quite worried about still-strong wage growth and very poor productivity performance, which is putting some upward pressure on inflation.”
While the Bank’s Wednesday announcement noted that the Canadian economy had stalled since the middle of last year and suggested growth would likely remain flat in 2024’s first quarter, it also highlighted that persistent underlying inflation as a concern and reiterated its focus on the economy’s supply-demand balance.
In other words, “they still need to see more evidence that inflation is falling on a sustained basis back to the 2% target,” Guatieri said. “They need more time to allow policy to do its work and slow inflation further.”
ICYMI: Higher interest rates are helping to slow the economy and cool inflation. While we are seeing progress, inflation is too high. There are some risks that might make it challenging to bring inflation back to our 2% target.https://t.co/Z73GAvRapS#economy #cdnecon pic.twitter.com/r1kPMCfLXs
— Bank of Canada (@bankofcanada) January 25, 2024
When will interest rates start to fall?
While market optimism towards a possible April rate cut has recently surged, the Bank’s latest statement did little to shift BMO’s view that downward movement won’t take place until the summer – with a cut pencilled in for June at the earliest.
Overall, the central bank struck the right tone on the economic outlook in its January announcement, according to Guatieri, walking a careful tightrope of adopting a more dovish approach while not tipping consumer and market optimism into overdrive.
The economy remains sufficiently weak to hold rates where they are – but inflation is also proving resilient enough to keep a cutting timeline off the table for now, he said.
“There’s no need to raise interest rates further, barring an upside surprise on inflation, but in the same light inflation has been stubborn and we’re still seeing stickiness on the services side, shelter costs and wage growth,” he said.
“So it would be premature to rush into easing policy at this point and running the risk of inflation reaccelerating. I think the Bank of Canada is cutting the right balance here and saying, ‘Yeah, the next move on rates is most likely a reduction. But there’s no reason for us to rush into cutting rates.’”
Shift towards rate cuts would mark a significant turn for central bank
After keeping its policy rate rooted at 0.25% throughout nearly two years of the COVID-19 pandemic, the Bank of Canada embarked on a rate-hiking path in March 2022 against a backdrop of surging inflation and supply chain snarls.
That series of hikes has seen the central bank’s trendsetting rate jump 10 times, by a total of 475 basis points, to 5.0% – its highest level for 22 years.
The central bank has kept rates steady in its last four announcements, with Governor Tiff Macklem suggesting at the end of last year that rates were likely high enough to continue bringing inflation back towards its target range.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
