2024-01-21 15:48:39
(Ottawa) As the Bank of Canada prepares to announce its next interest rate decision on Wednesday, economists will be watching for clues on when it plans to start cutting interest rates.
Overall, Wednesday should not bring any big surprises. The central bank is widely expected to continue keeping its key interest rate at 5%, as it has done in its last three interest rate announcements.
But as the economy continues to slow and forecasters anticipate a steady decline in inflation, economists are eagerly watching for signs from the Bank of Canada that it is ready to change course.
“What I’m looking for is what I would call the next step,” said Dominique Lapointe, global macro strategist at Manulife. By the next step, I mean recognizing that the rate hikes are over. »
So far, the Bank of Canada has not ruled out the possibility of raising interest rates again if inflation does not cooperate. However, forecasters do not believe that a further rate hike is really possible.
Nathan Janzen, deputy chief economist at the Royal Bank of Canada (RBC), says that while the central bank could still keep the door open to further rate hikes on Wednesday, it is “unlikely that it will have to exercise this option “.
The Bank of Canada is expected to cut interest rates this spring to avoid a deeper economic slowdown than is necessary to fight inflation.
Over the past year, the Canadian economy has stagnated as borrowing costs have weighed on businesses and consumers. This lower growth has translated into a less dynamic labor market, with fewer vacancies and a higher unemployment rate, at 5.8%.
Its consumer expectations survey indicates Canadians are also cutting back on spending, as higher interest rates force mortgage holders to cut spending so they can afford higher monthly payments.
This decline in consumer spending is expected to further dampen the economy this year.
Manulife’s 2024 economic outlook suggests the economy will slow in the first half before returning to growth.
“It will be a weak year, whether or not we face a technical recession,” said Mr. Lapointe. The question will be how long will this slowdown last? And will we be able to achieve a sustainable recovery in the second half of this year? »
He added that the expected rebound in the second half depends on lower interest rates.
The Bank of Canada is not expected to start discussing rate cuts just yet, however, especially since inflation rose last month.
Canada’s annual inflation rate rose to 3.4% in December, as underlying price pressures failed to ease. According to Mr. Lapointe, the fact that basic measures of inflation — which exclude price volatility — increased last month poses a communication problem at the central bank.
“I think it’s a problem for the Bank of Canada — it’s also a problem for consumers — in the sense that it suggests that pricing pressures on the commodity front are more persistent than we realize. pensions. And that probably complicates their message next week,” he said.
The Bank of Canada has already acknowledged that returning to 2% inflation would have some obstacles along the way. Governor Tiff Macklem said the central bank would not react to every hiccup, but rather would respond to consistent trends.
“We still think the most likely path for inflation is a lower path. The economy seems softer, monthly inflation data will rebound, but the general trend is downward,” detailed Mr. Janzen.
In addition to its interest rate announcement, the Bank of Canada will release its quarterly monetary policy report on Wednesday. The report will include new forecasts for the economy and inflation.
In October, the Bank of Canada forecast that inflation would fall to 2% in 2025.
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