Economists divided on whether the central bank will ease monetary policy
As the Bank of Canada prepares to announce its interest rate decision this Wednesday (June 5), speculation is mounting that the central bank is poised to lower its key lending rate for the first time since 2020.
Financial markets are predicting a quarter-percentage point cut, although some experts believe the bank might opt for a more cautious approach and delay the move until later in the year.
Nathan Janzen, assistant chief economist at RBC, believes the conditions are ripe for a rate cut.
"All the ingredients are there to justify lower interest rates," Janzen said in an interview with The Canadian Press.
He anticipates cuts in both June and July but expects the central bank to maintain a "cautious tone" about future adjustments.
A rate cut this week would mark a significant turning point for the Bank of Canada, which has been aggressively raising rates since March 2022 to combat surging inflation. It would also provide relief for households with variable mortgages and those renewing in the coming months.
However, Janzen noted that an interest rate cut is a “symptom of the Canadian economy underperforming."
Governor Tiff Macklem has indicated a cut is possible but dependent on incoming economic data. While inflation has steadily decelerated, with the annual rate falling to 2.7% in April, economic growth faltered in the first quarter.
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Economists like Tu Nguyen of RSM Canada argued that a rate cut is warranted, citing the lagging economy and rising unemployment despite inflation progress.
Even after an initial cut, Nguyen said the policy rate would remain restrictive as the Bank aims to restore price stability.
RBC expects four rate cuts this year, taking the policy rate down to 4%, compared to just one cut from the Federal Reserve, based on Canada's weaker economic backdrop.
However, not everyone sees a June cut as certain. TD Bank said in a recent report it expects the Bank to wait until July, noting Macklem has only acknowledged inflation progress rather than signalling an imminent move. Some policymakers also saw less risk of overtightening, TD said.
However, with inflation cooling and growth struggling, most analysts anticipate the Bank of Canada will end its tightening cycle this week and begin easing monetary policy to support the economy.
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