Could the Bank of Canada cut interest rates next week?

Central bank's second announcement of the year arrives on March 6

Could the Bank of Canada cut interest rates next week?

All eyes in the mortgage world will be on the Bank of Canada next week as the central bank reveals its much-anticipated decision on interest rates – but those holding out hope for a rate cut are likely to be left disappointed.

The Bank is widely expected to begin trimming its benchmark rate this year but while some observers believe a spring cut could still be in the offing, few believe next week’s announcement will mark the beginning of that path.

A new analysis by Desjardins Group suggested the central bank “should begin cutting interest rates around the spring,” although chief economist Jimmy Jean told the Financial Post that April is probably the earliest a rate drop will occur.

Recent indications of a still-strong labour market may have given the Bank of Canada pause for thought on its rate-cut timeline, even if overall inflation fell by more than expected at last reading to 2.9%.

Keith Reading (pictured top), senior director of research at real estate firm Morguard, told Canadian Mortgage Professional that while economic factors largely appear to be trending in the right direction for the Bank, they will likely be eager to pour cold water on the prospect of an unexpected uptick in economic activity.

“Right now, I think the Bank of Canada is hinting that rate cuts might be a little further off than first anticipated,” he said. “There were a lot of people thinking the spring or summer of this year. But I think the Bank is sort of [indicating], ‘Hold on – it may be a little bit longer.’

“Part of that is we’ve had a pretty good job growth figure to open January, and inflation has certainly come down. But we’re still not at the 2% target that the Bank likes – so it may take longer for rates to come down.”

How much will the Bank of Canada eventually cut rates by?

Desjardins’ outlook calls for five 25-basis-point cuts to both the Canadian and US overnight rates in 2024, with further declines expected to take place next year. Reading said he’s expecting a cautious approach from the central bank, although the onset of cuts is likely to help boost investor confidence and bring them off the sidelines.  

“I’m of the opinion that the Bank, as it’s done historically, will be careful and conservative. I don’t think we’re going to see a 50-basis-point drop in the Bank’s policy rate immediately,” he said.

“I think you might see a 0.25% drop, and then much more gradual cuts. But I think once they do start to come down, you’ll see investor confidence pick up and it should kick off what investors are looking for: stability in terms of interest rates, and what the debt market’s going to look like.”

March rate hold likely – but April could be a different story

Against that backdrop, the Bank’s most likely course of action in next week’s announcement is another rate hold, which would mark a fifth consecutive decision with no upward change.

Still, that better-than-expected January inflation data has helped boost market confidence that an April cut could be on the way.

Money markets’ expectations of an April rate drop soared to 58% in the wake of last Tuesday’s (February 20) consumer price index (CPI) reading, up from 33% prior to the news.

 The central bank last slashed its policy rate, which leads variable interest rates in Canada, at the onset of the COVID-19 pandemic – cutting that trendsetting rate to a rock-bottom 0.25% in March 2020 as the economy reeled from shutdowns and global uncertainty.

That rate remained unchanged for nearly two years, with ultra-low borrowing costs helping herald a housing market boom as borrowers rushed to take advantage of access to cheap credit, before the Bank began hiking again in 2022 amidst surging inflation.

Bank governor Tiff Macklem hinted at the end of last year at possible rate cuts coming down the line in 2024 – but refused to be drawn on a potential timeline.

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