Speculation grows for mid-year rate cut as inflation cools
All eyes are on the Bank of Canada (BoC), waiting for its policy decision today.
Analysts expect the central bank to keep its key overnight rate unchanged as the BoC gathers further evidence of a sustained decline in inflation before potentially lowering rates for the first time in four years, Reuters reported.
Economy is frail
Canada's inflation rate, including core measures tracked by the BoC, has shown a promising trend. After peaking at 8.1% in June 2022, it has begun to cool down. Additionally, Friday's labour force survey indicated signs of a softening job market.
However, a premature rate cut could inadvertently reignite the housing market, a key driver of inflation in Canada.
"The economy is really quite frail," Pedro Antunes, chief economist of Conference Board of Canada, told Reuters. "Bankruptcy rates for businesses are just skyrocketing, profits are down, inventories are high.”
Consumer spending, according to Antunes, is only being propped up by population growth. While expecting a hold this week, Antunes anticipates the BoC moving swiftly towards a rate cut in the near future.
Canada's immigration-fuelled population growth has created an unprecedented housing shortage. Many first-time homebuyers and renters are eagerly awaiting a reduction in borrowing costs, which currently sit at a 22-year high. This could trigger a surge in market activity once rates begin to fall.
Market bets
The BoC will announce its official policy decision on Wednesday, April 10, at 9:45 AM ET. This announcement will be accompanied by the release of its quarterly monetary policy report, outlining economic and inflation projections.
Financial markets are increasingly confident in a June rate cut. The probability of a 25-basis-point reduction has climbed to around 78%, up from 70% at the end of March. A July cut is considered almost certain, while April is widely expected to be a hold.
A Reuters poll revealed that over 70% of economists (27 out of 38) anticipate a June rate cut, aligning with market pricing. A smaller group (seven) predicted July, while the remaining four believe a cut won't occur until September.
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Over the past 17 months, the BoC has aggressively raised interest rates by 475 basis points, bringing them to their current level of 5%. While this strategy has helped cool inflation to 2.8% in February, it has also significantly impacted mortgage costs and dampened consumer and business spending.
Governor Tiff Macklem stated in March that it was still too early to consider rate cuts. The BoC prioritizes seeing concrete evidence of a sustained decline in underlying inflation before changing course.
"At this point, it's really a coin toss between the first rate cut in Canada happening in June or July, but I think it will only be June if the good news on inflation continues," Canadian Chamber of Commerce chief economist Stephen Tapp said in a statement.
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