The Bank of Canada will reveal this morning what it decides to do with the key rate, which influences interest rates in the country. According to economists’ forecasts, it should be kept unchanged at 5%. The institution’s analysis of the Canadian economy will be one to watch, because it will give a clue as to what the Bank of Canada intends to do in the coming months.
The last increase in the key rate in Canada dates back to last July. This then increased from 4.75% to 5% – a tenth increase in just 18 months. However, since then, on two occasions, the Bank of Canada has kept the key rate stable. And that’s probably what she’ll do again.
“Next week’s Bank of Canada interest rate decision is unlikely to come as a surprise,” write Nathan Janzen and Claire Fan of the Royal Bank of Canada (RBC) in a brief economic analysis. “The Bank of Canada is expected to maintain the overnight rate at 5%,” they say.
Same story at Desjardins. Economist Randall Bartlett analyzes that “the weakness” of the labor market, the slowdown in underlying inflation and the contraction of real GDP by 1.1% in the third quarter, “should encourage the Bank of Canada not to touch the key rate.”
As a reminder, with the muscular monetary policy it has pursued over the past two years, the Bank of Canada is seeking to cool the economy in order to curb price growth in the country. It wants to bring inflation — measured by the change in the consumer price index (CPI) — to the middle of its target range of 1% to 3%.
Last October, inflation stood at 3.1% on an annual basis in Canada, well below the peak of 8.1% reached in June 2022, but still above the target of 2 % that the Bank of Canada is targeting.
When will there be a rate cut?
The slowdown in inflation is proof that monetary policy is working, argued the Governor of the Bank of Canada, Tiff Macklem, last October, on the occasion of the latest announcement on the key rate. But this slowdown is happening more slowly than hoped. And it was still too early, at that time, to talk about a possible rate cut, according to Mr. Macklem, who went so far as to open the door to other rate increases if necessary.
“The Bank of Canada will remain aware of inflationary risks and will retain the possibility of increasing the interest rate. But we don’t think this is necessary,” assess RBC’s Nathan Janzen and Claire Fan.
According to the two economists, the debate at present is no longer so much about whether further increases will be required, but rather about how long it will take before the Bank of Canada begins to lower its rates.
The institution “will not rush” to do so, believe RBC economists, who estimate that rates should remain stable throughout the first half of 2024, before decreasing from the third quarter.
Desjardins economists think this will happen a little sooner, and are banking on a rate cut as early as the second quarter of 2024.
The Bank of Canada’s press release will be issued at around 10 a.m. this Wednesday.