Bank of Canada rate cuts window in 2023 could be narrowing: BMO's Porter

The central bank "pushed back a little bit harder" on the possibility of a rate cut this year

Bank of Canada rate cuts window in 2023 could be narrowing: BMO's Porter

Recent weeks saw financial markets begin to price in the prospect of Bank of Canada interest rate cuts before the end of the year – but did the central bank close the door on that possibility in its announcement yesterday?

While it left its benchmark rate unchanged at 4.5% in the April 12 decision, the Bank said it was prepared for further hikes if required to bring inflation back down towards its 2% target, a statement that seemed to indicate upward rather than downward movement on rates was more likely in 2023.

There was little surprising about the Bank’s remarks, according to BMO chief economist Doug Porter (pictured top) who told Canadian Mortgage Professional that “not a whole lot changed” in the central bank’s outlook despite a slightly more hawkish tone on rates.

“It was a fairly balanced set of remarks and if anything, perhaps at the margin, they pushed back a little bit harder on the possibility of rate cuts this year,” he said.

A remark by Bank governor Tiff Macklem in yesterday’s press conference indicating that the market’s pricing of rate cuts later in 2023 was not the most likely scenario was a “pretty clear comment,” Porter said, although there remains a small chance that rates could fall before the end of the year.

“They’ve got the door open a very thin crack,” he said. “If inflation melts even faster than expected, there is a slight possibility that they could be trimming interest rates by later this year. Officially, that’s what the financial markets have priced in – they’ve got one quarter-point cut by the end of the year.

“Our view is that while that’s possible, it’s probably more likely that the Bank will stay patient and not move on rates until 2024.”

Inflation ticking down while economy remains strong

While inflation has continued to fall at a decent clip this year, the Bank noted that Canada’s labour market remains tight with stronger-than-expected economic growth continuing and aggregate consumption remaining elevated.

The fact that inflation is not proving stickier may have tempered any possible anxiety by the Bank on the economic outlook, Porter said, with some room for positivity if inflation continues declining while the economy remains in solid shape.

“On the one side, if inflation wasn’t coming down and we still had this very robust economy, I thought that they could be getting anxious, but the reality is inflation has come down at least as quickly as they expected, if not even a bit faster,” he said.

“So while they might be a bit surprised at how resilient the economy has been, I think they’re perfectly OK with that if inflation keeps coming down. It’s a bit of a mixed picture for the Bank, and in a way… it’s a good problem to have, that growth is hanging in there better than expected and yet inflation is easing about as they expected.”

What effect did the recent US banking crisis have on the BoC decision?

The collapse of Silicon Valley Bank and Signature Bank roiled financial markets in the US last month, triggering fears that a contagion effect could spread to Canada. While that chaos appears to have stabilized for now, the Bank’s latest statement mentioned that banking sector stress as having tightened credit conditions in the US, with slower growth expected in the quarters to come.

Porter said the main consequence of that turmoil for Canada was that it had significantly reduced the possibility that the Bank might increase interest rates in the near future.

“It’s interesting that here we are, barely a month since the banking sector stress began in the US and it was almost relegated to being an afterthought in most of the comments, although it did get a little bit of a mention,” he said. “I think what that’s done is really removed, for now, the risks of the Bank hiking again.

“If you think back to about five weeks ago, before US banking sector stress, there was widespread opinion that the Bank was going to have to raise interest rates again later this year, and not too many people are talking about that anymore. And I would pin a lot of that on the strain that we saw in the banking sector, and the anticipated tightening of credit that we’re likely to get – at least in the US.”