February 1, 2024
Former Bank of Canada deputy governor Paul Beaudry said he expects the central bank to start cutting interest rates in July, later than markets are currently predicting, as inflationary pressures remain stubborn.
“If you look at the [Bank of Canada’s] projection … it’s mid-2024 they’re predicting that some of these underlying forces in inflation should be coming down,” Prof. Beaudry said in a conversation with Canadian Imperial Bank of Commerce chief economist Avery Shenfeld, published by CIBC on Tuesday.
“My impression is they’ll be hesitant to reduce rates until that period, I’d say the midyear. So I wouldn’t see the potential rate cuts until probably the July decision.”
Last week, the Bank of Canada kept its benchmark interest rate steady at 5 per cent for the fourth consecutive time but dialled back its threats of additional rate hikes. Bank officials now believe interest rates are high enough to pull inflation back to the bank’s 2-per-cent target over time, and discussions have shifted to how long to keep them at the current restrictive level.
Most Bay Street analysts think the bank will start easing monetary policy around the middle of the year, with many pointing to the June rate announcement as the most likely time for the first cut. Interest rate swap markets, which capture market views on future monetary policy, put the odds of an April rate cut at about 45 per cent and a June rate cut at about 80 per cent, according to Refinitiv data.
Prof. Beaudry, who left the central bank last summer to return to academic work at the University of British Columbia, said it may wait slightly longer before cutting rates to be certain that inflationary pressures are under control.
“A lot of the core [inflation] measures haven’t been coming down. There’s this aspect of wage growth that’s quite high … Expectations, price behaviour – they’re all really moving slowly or not moving too much,” he said.
“Now, [the bank] could move faster if everything actually moves a lot faster and these price pressures disappear. But if they just stagnate, as they’re doing now, then I think there will be this tendency to at least want to wait until the midyear.”
Inflation has fallen a lot over the past 18 months. Annual consumer price index growth has declined from a four-decade high of 8.1 per cent in mid-2022 to 3.4 per cent in December. However, core inflation measures, which strip out volatile price movements, remain stuck in the 3.5-per-cent to 4-per-cent range, and there are still pockets of rapid price growth, particularly for housing and food.
The bank’s latest inflation projections see headline CPI inflation hovering around 3 per cent until the middle of the year, before falling to 2.5 per cent by the end of 2024 and back to the 2-per-cent target in 2025.
Tight monetary policy, which raises the cost of borrowing money and servicing debt, is working to slow the Canadian economy, as intended. However, economic activity in the fourth quarter of 2023 appears to have been stronger than expected. Statistics Canada reported Wednesday that real gross domestic product grew 0.2 per cent in November, outpacing a previous estimate of 0.1 per cent.
Prof. Beaudry said the Bank of Canada is in a tougher position than the U.S. Federal Reserve as it tries to bring inflation to heel. Economic growth has remained stronger in the United States, which typically would mean more inflationary pressures. However, worker productivity is growing much faster in the U.S. than in Canada, which means wage growth is less inflationary.
“Even at 4-per-cent wage growth, if you get those productivity surprises, it doesn’t mean it passes through to prices. So you get a dynamic that’s much more positive in the U.S. in bringing in this possibility of a Goldilocks scenario of actually coming down with inflation and really not even getting into a period of excess supply or anything to get to that point,” Prof. Beaudry said.
The Fed announced its latest interest rate decision on Wednesday, holding steady as analysts widely expected.
Bank of Canada Governor Tiff Macklem and senior deputy governor Carolyn Rogers are speaking to the House of Commons standing committee on finance on Thursday, starting at 11:30 a.m. ET.
