Central bank's March statement ‘not as dovish’ as many expected – but it's still set for a summer cut
The Bank of Canada gave no indication in its March announcement that interest rates are set to fall soon – but the central bank is still likely to cut in June, according to CIBC deputy chief economist Benjamin Tal (pictured).
Yesterday’s statement saw the Bank maintain its benchmark rate at 5.0%, the fifth decision in a row it has left rates unchanged, and indicate its continuing concern over Canada’s inflation outlook.
Still, while its tone was slightly more hawkish than many had expected, Tal said the central bank had good reason not to give away the game on when it’s likely to begin bringing rates down.
“What’s interesting is the language of the statement, which is not as dovish as some people expected,” Tal told Canadian Mortgage Professional after yesterday’s announcement. “There’s no hint of any cuts coming. They’re concerned about sticky inflation – and I think it makes sense.
“You cannot have the Bank of Canada hinting at cutting without causing some changes in the market. They don’t want to see the long end of the curve, the five-to-10-year rates, falling too rapidly. Also, if the situation is so good, why aren’t you cutting now? So they have to justify why they’re not cutting, and they cannot be dovish.”
BoC continues to focus on inflation reduction
Markets had priced in little to no chance of a cut in yesterday’s announcement, with expectations weighed heavily towards a rate drop later in the year – and for Tal, the Bank is likely to use April’s monetary financial report as an opportunity to start hinting at a cut before lowering rates for the first time in July.
The Bank said on Wednesday it expected inflation to remain around the 3% level throughout the first half of 2024 before gradually easing – although it also “wants to see further and sustained easing in core inflation” and is focused on the economy’s demand-supply balance.
It continues to focus on inflation measures that include mortgage interest payments, which have spiked in tandem with the central bank’s benchmark rate over the past two years.
We have maintained our policy interest rate at 5.00%.
— Bank of Canada (@bankofcanada) March 6, 2024
Learn more: https://t.co/1oZYh7lrBi#economy #cdnecon pic.twitter.com/29y6dRSUEh
Observers including TD Economics have highlighted the difficulty of returning inflation towards the Bank’s 2% target while interest rates – and by extension, mortgage interest payments – remain high.
“In order to get to 2%, ironically, you need to cut,” Tal said. “I think that’s something that will be coming. But I think that they are still unwilling to do the adjustment, remove mortgage interest payments from the calculation – and that’s something that will complicate the message. But none of that will change my mind that the first cut will be in June.”
What does the latest BoC decision mean for the housing market?
Major Canadian housing markets including Toronto have seen homebuyers step off the sidelines in growing numbers since the beginning of the year, emboldened in part by growing confidence that rate hikes are at an end and lower borrowing costs are on the way.
“Buyers are coming back slowly. I think we know that buyers do care about the level [of rates], but also they care about the trend,” Tal said. “And they know that the trend is basically down as opposed to up in terms of future rates.
“So that’s something that takes some people into the market. I think that that trend will accelerate when we actually see cuts – let’s say in June. So that will be accelerated in terms of more people in the market.”
Lower rates are also likely to impel more sellers to enter the market, Tal said – with that increased supply from the resale market set to prevent prices from rising dramatically even as homebuying picks up in the spring.
Still, even if the Bank chooses to cut rates in June, there seems little prospect of a housing market surge that month, he added. “I don’t know if I would use the word ‘surge’ – but I definitely would use the word ‘improvement,’” he said. “I think the fall will be strong.”
While there was no indication of coming rate cuts in today’s statement, Tal said Canadians also shouldn’t be surprised by the Bank’s cautious tone.
“I think people should not be disappointed by the language because the Bank cannot really use dovish language in this environment,” he said. “They will keep it for later.”
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