(Ottawa) The Bank of Canada will announce its latest interest rate decision on Wednesday, and speculation is rife that the central bank may cut the key rate for the first time in more than four years.
Overall, financial markets expect the central bank to cut its key rate by a quarter of a percentage point, but this view is by no means universal, with some expecting it to be patient again.
“All the ingredients are there to justify lowering interest rates,” Nathan Janzen, RBC’s deputy chief economist, said in an interview.
Although he expects the central bank to cut interest rates in June and July, Janzen says the central bank will likely maintain a “cautious tone” on future moves.
A policy rate cut this week would mark a major turning point for the Bank of Canada, which began aggressively raising interest rates in March 2022 in response to rising inflation.
It would also provide relief to households with variable rate mortgages and reduce rising repayments for those due to renew their mortgages in the coming months.
But Mr. Janzen noted that the move toward interest rate cuts is something of a bad news story, as it is also a “symptom of the underperformance of the Canadian economy.”
A decision guided by economic data
If the Bank of Canada chooses to cut its benchmark rate on Wednesday, it will be the first cut since March 2020, when the COVID-19 pandemic prompted the central bank to cut its benchmark rate to near zero.
Bank of Canada Governor Tiff Macklem said a rate cut was possible, but the decision would be guided by economic data. He said the central bank was seeing what it needed to see, but wanted to see it over a longer period of time to be sure progress toward price stability was sustainable.
Economists have been particularly encouraged by the marked slowdown in price growth in Canada.
Annual inflation for April stood at 2.7%, compared to 2.9% in March.
Fundamental measures of inflation, which exclude price volatility, have also gradually eased in recent months.
The interest rate decision comes on the heels of a Statistics Canada report last week that found economic growth in the first quarter fell short of Bank of Canada expectations. Statistics Canada also revised its growth figures downward for the fourth quarter of 2023.
However, the April jobs report showed that employment increased by 90,000 for the month, the largest increase in more than a year. The unemployment rate remained at 6.1%, a percentage point higher than a year ago.
A key rate of 4% at the end of the year?
Tu Nguyen, an economist at accounting and consulting firm RSM Canada, says there is “no doubt” the Bank of Canada is expected to cut interest rates this week.
“Keeping the rate at 5% could do little other than dampen the economy, given that inflation has already fallen, the economy has not grown for some time now, and the unemployment rate is increasing,” she said.
Mme Nguyen argued that even after cutting interest rates, the Bank of Canada’s rate policy will remain “restrictive” for some time, meaning interest rates will continue to weigh on the economy and to slow inflation.
RBC expects the central bank to cut interest rates four times this year, bringing its benchmark rate down to 4%.
On the other hand, she only expects a reduction of a quarter of a point from the American Federal Reserve.
“We believe the magnitude of divergence is justified, given the context of weaker economic growth in Canada,” Mr. Janzen said.
All the same, some still believe that the Bank of Canada will wait until July to reduce its key rate.
In a report released Friday, TD said it expects the Bank of Canada to wait until next month to cut interest rates, despite progress on the inflation front.
“First, the governor [Tiff] Macklem only acknowledged progress, but did not explicitly signal his intention to act,” TD emphasized.
TD also noted that the Bank of Canada’s recent summary of deliberations showed that some board members believed there was less risk that higher rates would slow economic activity more than necessary.