January 25, 2024
The Bank of Canada has finally acknowledged that interest rates will likely be coming down this year — but still won’t say exactly when.
As widely expected, the Bank announced Wednesday morning that it’s keeping its key overnight lending rate at five per cent, but hinted that there could be cuts coming, even though inflation is still higher than it would like. In a press conference, Bank governor Tiff Macklem refused to be pinned down on when rates will come down, acknowledging that economic forecasting is not an exact science.
“I think it’s important we don’t give Canadians a false sense of precision,” said Macklem. “I worry that putting it on a calendar is a false sense of precision.” Still, Macklem said the Bank’s governing council had a broad consensus that rates likely wouldn’t need to rise again.
“If the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at five per cent,” Macklem said. Over the past 22 months, the Bank has hiked interest rates 10 times in a bid to bring inflation under control.
The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving prices down and slowing the economy. The reverse is also true, according to standard economic theory: rate cuts make it likelier for consumers and businesses to spend money, making the economy grow more quickly.
In December, Canada’s annual rate of inflation rose to 3.4 per cent, up from 3.1 per cent in November. While that’s lower than the 8.1 per cent inflation peaked at in June 2022, it’s still higher than the Bank’s official target of two per cent. Falling demand (partly because of the bite from previous rate hikes) and improved supply chains are pushing inflation lower, Macklem said.
“With weak demand in the economy, upward pressure on prices should continue to moderate, and inflation is expected to ease further. The share of consumer price index (CPI) components that are rising faster than three per cent has declined substantially and should continue to normalize,” Macklem added.
Economists and other rate watchers now believe it’s a question of when — not if — the Bank will cut rates this year.
“We’re not going to see any more hikes. They’ve pretty clearly taken that off the table. It’s just a question of how much longer they’re going to keep rates high,” said Pedro Antunes, chief economist at the Conference Board of Canada, which predicts that the Bank will start cutting rates by the middle of the year. The Canadian economy, said Antunes, is creeping along so slowly that keeping the overnight rate at five per cent for much longer isn’t necessary.
“The economy is at a crawl,” said Antunes. Trading on the overnight interest swaps market has already fully priced in a quarter percentage point rate cut by June, and is indicating a 40 per cent chance of a cut in April, said Benjamin Reitzes, macroeconomic and rates strategist at BMO. BMO’s forecast predicts rate cuts will start in June.
Still, said Reitzes, the Bank is concerned enough about the continued strength of inflation that it’s in no rush to cut.
