Economists react as BoC holds rates steady

Analysts debate when easing will start, inflation remains crucial factor

Economists react as BoC holds rates steady

The Bank of Canada's decision to maintain its key interest rate at 5% was no surprise, but experts say the move signals potential rate cuts in the coming months.

While Governor Tiff Macklem noted conditions are aligning for a cut, he emphasized the need for sustained progress on inflation before easing.

Economists polled by Bloomberg unanimously expected the hold. 

"If things continue to evolve the way we expect on inflation, it will be appropriate to lower interest rates this year," National Bank Financial chief rates strategist Warren Lovely told BNN Bloomberg. "We didn't get that cut today, but it seems like it's coming just with a little bit more CPI evidence in hand."

Lovely sees a July cut as most likely, with June also possible.

“I think what we can expect is the Bank of Canada cutting interest rates two to three times this year,” he said.

RSM Canada economist Tu Nguyen expects the first cut as early as June. 

"Waiting any longer would risk repeating the mistake made in 2022 of acting too little, too late," Nguyen said.

Meanwhile, external factors such as persistent US inflation are complicating the Bank of Canada's rate strategy, according to Phil Mesman, portfolio manager and co-head of fixed income at Picton Mahoney Asset Management.

He noted the challenges posed by recent inflation readings in the US, which have remained high.

"Today’s strong US Consumer Price Index fifth hot reading in a row and this far into the tightening cycle makes it difficult for the BoC to move despite Canada/US inflation and labour divergence," he said. "The BoC must balance Canada's inflation easing and labour cracks with the persistent US inflation data."

Brooke Thackray, research analyst at Horizons ETFs, commented on the economic strain felt by Canadians, noting the difficult position in which the Bank of Canada finds itself with persistently high inflation.

Thackray said Macklem "will likely need to see more solid evidence that inflation is under control before making an initial rate cut."

“A release of a low inflation rate would go a long way to enabling the Bank of Canada to make its first interest rate cut at its next scheduled meeting on June 5,” he said.

Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.