March 7, 2024
The Bank of Canada made it quite clear Wednesday when it held its interest rate steady at 5 per cent for the fifth session in a row that it is too early to talk about cuts.
Inflation remains the sticking point and while the central bank acknowledged some progress — headline inflation eased to 2.9 per cent in January — it wasn’t enough. Core inflation in January remained above 3 per cent and the share of items in the consumer price index basket still running hot are above historical averages.
“The council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” the bank said in its statement. So we wait. Most economists still expect the first cut in June, but after Wednesday’s decision, markets pared their bets on that timing. A cut for July is still fully priced in.
Others think even that is optimistic. There are three more inflation readings to come before the bank’s June meeting, and Laurentian Bank economists Sebastien Lavoie and Salim Zanzana think neither February nor March data will show sufficient cooling.
Overall inflation may ease to 2.5 per cent in April, but core inflation might not cool enough for the central bank to cut in June, as Laurentian had been expecting.
Moreover, the Bank of Canada’s business survey in February showed that more companies planned to increase prices in the first quarter of 2024, a halt to progress on the normalization of corporate pricing behaviour, a factor the bank looks at, said the economists.
“As such, a first policy rate cut in July or September appears more suitable given recent economic conditions and the near-term path, considering the risk of under- and over-shooting monetary policy,” they said. The Laurentian economists also think the reduction in rates in the second half of the year could be less than expected, 75 basis points rather than 125 bps.
Governor Macklem had this to say on the pace of cuts when asked about it by a reporter Wednesday: “I think it’s very safe to say we’re not going to be lowering rates at the pace we raised them.”
For Derek Holt, head of Capital Markets Economics at the Bank of Nova Scotia, Wednesday’s decision confirmed what he has been saying for awhile: no cut until September “and a lot has to go right to even get to that.” The bank’s short statement, leaving the last paragraph intact, shows it is “clearly on the sidelines” and has ruled out any near-term easing, he said in a note.
“The opening remarks continued to flag that ‘underlying price pressures persist’ and Governing Council is ‘concerned about the persistence of underlying inflation’ amid ongoing ‘upside risks to inflation.’ Macklem said ‘Looking ahead, we continue to expect inflation will be close to 3 per cent through the middle of the year before easing in the second half,” said Holt.
“None of that is the language of a central bank moving toward easing anytime soon.” Answering questions after the decision, Macklem did allow that a housing market surge this spring and big spending announcements in upcoming provincial and federal budgets could affect inflation and thus their rate decisions.
Mortgage analyst Robert McLister’s take is that the Bank of Canada might not see the inflation progress it needs until late in the second half if:
- “the housing market turns up the heat
- the Liberals open their spending taps wider in the new budget, or
- excessive wage growth doesn’t simmer down.”
“To sum up, StatsCan’s March 19 and April 16 CPI releases better bring us good news on inflation, or it’s group therapy time,” he wrote.
