Bank of Canada decision: Did we learn anything new?

CEO on key takeaways from April announcement

Bank of Canada decision: Did we learn anything new?

A “guarded” statement by the Bank of Canada on Wednesday gave away little about a possible timeline for interest rate cuts, according to co-CEO and CanWise mortgage lender president James Laird (pictured).

The central bank chose to keep its benchmark rate on hold at 5.0% in its latest decision, with the statement making no mention of potential rate cuts down the line – although Governor Tiff Macklem replied with a terse “yes” when asked at the subsequent press conference whether a June cut was possible.

Laird told Canadian Mortgage Professional that the Bank appeared to be keeping its powder dry for the moment, possibly due to concerns that a premature cut could jeopardize its battle against inflation.

“What I read from [the statement] is they’re going to need to feel a good amount of certainty that a cut won’t undo all the progress that they’ve made over the last two years of heightened rates,” he said. “I think they err on the side of being a little longer than too quick.

“I think they have to feel certainty that it won’t hurt the inflation fight for them to think cutting rates is a good idea.”

How might the US outlook shape the Bank of Canada’s approach?

The Bank’s latest decision arrived shortly after new data in the US revealed inflation south of the border had risen by more than expected in March, with its core consumer price index (CPI), which excludes food and energy costs, jumping by 0.4% over the prior month and 3.8% on a year-over-year basis.

That’s fuelled speculation that the US Federal Reserve will push back its own timeline for rate cuts – and opened the door to the possibility that Canada, whose economy is performing more poorly than that of the US, could see central bank rate cuts even as the Fed stays on hold.

Such a situation could prove a difficult one for the Bank of Canada to handle, according to Laird.

“I think one of the toughest things for them to manage is going to be that the Canadian and US economies are going in different directions. The [Canadian] economy probably requires a rate cut before the US does, but if they do that, it has all kinds of other implications,” he said.

“It seems like usually we need to follow their lead – but that either means cutting rates before them or leaving rates too high, too long, and hurting the Canadian economy further.”

Many prospective first-time homebuyers are waiting in anticipation for the first signal from the Bank that a rate cut is on the way – but Laird said Wednesday’s hold, its sixth in a row, is unlikely to move the needle much where the housing market is concerned.

“I don’t think this statement changed much on housing valuations, demand, or dynamics,” he said. “I think if you were thinking of buying a house in spring, you’re still thinking of buying a house in spring – and if you weren’t planning on buying a house in spring, you’re still not.

“Either saying they’re going to cut soon or [making] that first rate cut – that will probably be impactful. But this one did not feel like it had anything that would shift the housing market much.”

How likely is a Bank of Canada rate cut in June?

All eyes will now be on the Bank’s next decision, scheduled for June 5, with traders appearing split on the prospect of a 25-basis-point cut in that announcement.

Despite Macklem’s admission that the Bank could bring rates down in June, market expectations of a cut that month receded from 84% to 56% in the wake of Wednesday’s announcement, according to Reuters.

Laird said the minutes of the central bank’s April decision, set for release in the coming weeks, will offer a valuable clue as to the likelihood of a June cut.

“I’m curious to see to what extent, or at all, did they actually talk about cutting rates this time – was it even on the table, or no?” he said. “If there’s going to be a cut next time, I think it will at least have needed to be discussed as a possibility or if it wasn’t even on the table for this one, then I would be less optimistic for a rate cut in June.

“But if they talked about it but decided ‘Not quite yet,’ that would make me more optimistic that they’re quite close to a rate cut.”

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