Analysts are split on early interest rate reductions
Some analysts are starting to think that the Bank of Canada might just lower interest rates in April, a move not many are expecting. This speculation stems from recent economic data that suggests Canada's economy is slowing down, which might be enough to convince policymakers to take action sooner rather than later.
According to a consensus among 17 economists in a Bloomberg survey, the expectation is for the Bank of Canada to maintain its key interest rate at 5% in its upcoming meeting and through to April 10. However, history shows us that early predictions, like the one made by Citigroup Inc.’s Veronica Clark last year about rate hikes, can eventually come true.
Those in favour of an April rate cut point to recent figures that show Canada's economy might be cooling off. Inflation dropped to 2.9% in January, with a noticeable decline in consumer spending at the beginning of the year.
Simon Harvey from Monex Europe thinks the upcoming data could be a game-changer: "If the renewed progress is sustained in February’s data, we think the BoC should begin to ease its policy stance back toward neutral, with any delay risking a recession in Canada," he told Bloomberg.
The big picture will become clearer with the release of more economic data, including the GDP numbers for the fourth quarter and updates on employment, wages, and inflation. The central bank's reaction to these developments, along with the Federal Reserve's decision on March 20, will be key factors in determining whether a rate cut in April is feasible.
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Rishi Mishra from Futures First Canada Inc. points out that if the Bank of Canada moves before the Fed, it could put the Canadian dollar under pressure, potentially raising inflation through higher import costs. However, he believes the odds of an April cut are higher than many think.
The Federal Reserve's next moves are crucial. As Mishra explained: "If the Fed’s not cutting yet, it would imply that the US economy is doing pretty well. In that scenario, for the BoC to cut rates, the economic data would need to be even more convincing."
Recent job figures and inflation data have led some analysts, like Stephen Brown of Capital Economics, to reconsider their predictions, suggesting the Bank of Canada's April meeting might see a rate cut, especially if economic and labour market data worsen significantly. The upcoming GDP report is a key piece of the puzzle for many, including Dominique Lapointe from Manulife Investment Management, who believes a weak growth figure could make the case for an April cut stronger.
As discussions continue, the economic landscape remains in flux, with all eyes on the Bank of Canada as it navigates through the latest data to make its next policy move.
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