Bank of Canada done on rate hikes – but April cut unlikely, says CIBC's Tal

Central bank unlikely to start cutting rates before June or July, according to top economist

Bank of Canada done on rate hikes – but April cut unlikely, says CIBC's Tal

While the Bank of Canada left interest rates unchanged as expected in its opening decision of 2024, the most noteworthy part of its announcement was the conspicuous lack of reference to possible future rate hikes, according to a top economist.

Benjamin Tal (pictured), deputy chief economist at CIBC World Markets, told Canadian Mortgage Professional that the central bank’s decision, which saw its benchmark rate remain at 5.0%, marked a clear sign that rate increases appear to be in the rearview mirror – even if the Bank is anxious to pour cold water on market speculation about an imminent rate cut.

“I think the most significant issue is that they removed the statement that they’re keeping the right to continue to raise interest rates. [It was] very much a less hawkish statement, but they’re still concerned about service inflation,” he said.

“This, to me, means that they are done [hiking] for sure – but at the same time, they probably want to make sure that the bond market is not too excited about the first cut. The market is talking about April for the first cut; the Bank of Canada would like to make us believe that maybe that’s too early.”

The Bank’s Wednesday statement reiterated its long-standing concern about risks to the overall inflation outlook, emphasizing the need to see a further downturn in core inflation.

Still, it expects inflation to hover around the 3% mark throughout the first half of this year and returning to 2% only by 2025, indicating a level of comfort with the current outlook and a willingness to tolerate higher inflation than expected, according to Tal, in the knowledge that the trajectory is downward.

“This is a less hawkish bank than a few months ago, clearly talking about [how] they’re still concerned, basically paying lip service about the persistence of service inflation,” Tal said, “but at the same time telling you that they’re not willing at this point to continue to raise rates and they’re basically done. That’s a very clear statement from the Bank of Canada.”

When will the first rate cut of 2024 take place?

The beginning of last year saw the central bank strike a dovish tone on interest rates, pausing its rate-hiking cycle in a message that saw an unexpected uptick in housing market activity across the country during the spring.

That’s a mistake the Bank seems keen not to repeat again in 2024, with its latest statement “keeping us guessing” on when rates might begin to fall, according to Tal.

“If they become too bearish, or too less hawkish, the market will start discounting a March or April move, which will basically lead to a rally in the long end of the curve, and that’s the last thing they want,” he said. “So I think they’ll keep us guessing but they will become less and less hawkish with time.”

While the Bank deliberately steered clear of putting in place a timeline for rate cuts with its January statement, Tal said it’s reasonable to expect June or July will herald the opening move of a rate-trimming cycle – but an April cut seems a fanciful prospect.

“I think that April is too early. It’s a tug of war between a slowing economy and still-elevated inflation, and elevated inflation eventually will raise the white flag,” he said. “But it will take longer than expected, and I think the Bank of Canada is not willing to cut prematurely.”

How the housing market will factor into the Bank of Canada’s thinking

Indeed, the protracted slowdown witnessed in Canada’s housing market since the beginning of the central bank’s rate hikes is one of the key reasons its language and tone have become increasingly less aggressive in recent statements, Tal said.

While national home sales saw an unexpected 8.7% uptick in December compared with the previous month, the market’s performance was largely sluggish throughout 2023, with similarly subdued activity expected in the opening months of this year.

“I don’t think they’re too concerned about it. I think they view it as a very healthy process,” Tal said. “And the last thing they want is to actually provide the injection of optimism that the price will be going down very quickly, and that will lead to another wave of buying in the housing market.

“So they would like to see a more modest recovery in the housing market – not something [like what] we saw early last year.”

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