BoC to keep rates on hold until second half of 2024: RBC

The central bank continues to be cautious about rate cuts

BoC to keep rates on hold until second half of 2024: RBC

The Bank of Canada is likely to keep its overnight rate on hold until the second half of 2024 before cutting rates, according to the Royal Bank of Canada (RBC)’s economic update.

The central bank kept its overnight rate unchanged at 5.0% in yesterday’s announcement, the third time in a row it has decided against hiking.

RBC economist Claire Fan said softer trends when it comes to consumer spending and labour market data were consistent with the mild economic downturn. This is still expected to continue into early 2024 as well as the ease of inflation pressures. However, the central bank will be expected to tread cautiously when it comes to rate cuts as it may decide against moving too quickly.

“Our own forecast is that the BoC will remain on hold until the second half of next year before cutting the overnight rate,” said Fan. “Risks are that the move comes earlier if the economic slowdown were to become faster and/or steeper than expected.”

The Bank’s preferred core inflation measures remain above the 1-3% target but have improved in recent months while the breadth of price pressures for consumers narrowed. Wage growth persisted at 4-5% range year-over-year with residual pressures being tied to longer-term contract renegotiations that lagged the past inflation yet with the softening in labour demand continuing, its strength was unlikely to continue.

There was a 1.1% annualized contraction in GDP that was seen in Q3 which came below the central bank’s projection in October which was a 0.8% increase. Labour market conditions saw a weakening as the unemployment rate in Canada has continued to rise since spring.

Notably, as the overall inflationary risks have continued to recede after it had dominated the economic landscape in the last two years, they are slowly becoming more equal with downside growth risks.

From the recent data, the Canadian economy seemed to be no longer in excess demand as of Q4 which implied that the BoC viewed the current economic conditions to be soft enough for inflation to return to the 2% target rate.