Investors watch closely as Bank of Canada weighs rate cut timing

Despite widespread speculation about potential interest rate cuts by central banks, there has been little movement so far this year, leaving investors and homebuyers in limbo amid persistently high inflation.

Central banks on both sides of the border have so far defied expectations of quick interest rate cuts. Earlier this month, the US Federal Reserve kept its benchmark rate steady at 5.25% to 5.5%, signalling no imminent plans to ease monetary policy despite earlier forecasts of up to six rate cuts this year.

The Bank of Canada has similarly held its policy rate at 5%, dashing hopes for a rate reduction as soon as June among some economists, despite Canada's slowing economy.

“Like most analysts, I believe it was the right call to keep rates unchanged as the US is battling with inflation over 2% – 3.5%, currently,” Michael Constantino, CEO of investment firm of Webull Securities (Canada), said in a Financial Post interview. “The earlier chatter from experts of a mid-year cut is becoming muted. I don’t expect a cut until sometime in the fourth quarter.”

The Webull chief executive offered his outlook on the interest rate impasse and its implications for Canadian markets.

While experts initially predicted mid-year rate cuts, Constantino now expects the Fed to cut rates only in the fourth quarter. He attributes this to the Fed's ongoing battle with inflation, which currently stands at 3.5%.

“The Fed’s decision and its most recent language might lead the Bank of Canada to pause a little longer but will not completely factor in on their final decision of what is better for Canadians,” Constantino said.

While the two nations' rates don't need to be in complete sync, Constantino said there is somewhat of a limit on how far the rates can diverge from one another.

“Bank of Canada governor Tiff Macklem has stated that we are nowhere close to that limit, and it is widely expected that policymakers will begin lowering its policy rate in the coming months despite the Fed taking longer,” he added.

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While some economists anticipate rate cuts as early as June, Governor Tiff Macklem has not confirmed this. Constantino believes a rate cut might be pushed back from mid-year, as lowering rates during the traditionally busy spring housing season could further inflate home prices.

Looking ahead, Constantino sees a "slight uptick" in Canada's economic outlook despite sluggish job numbers, with inflation edging back toward the 3% target later this year.

He anticipates inflation easing towards the Bank of Canada's target of 3% by late 2024 or 2025. He advised investors to closely monitor the Canadian economic landscape and pay attention to Macklem's statements in upcoming meetings.

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