Interest rate cuts are coming, but the Bank of Canada won’t say when

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Weary Canadian households, hit by nearly two years of rising prices and soaring interest rates, will have to wait a little longer for relief on their borrowing costs.

The Bank of Canada left its overnight policy rate unchanged at 5 percent on Wednesday, citing persistent underlying inflation and concerns that it could declare victory too soon and be forced to reverse course.

But the bank says it’s no longer about whether rates are high enough, but rather about how long rates should stay high.

“If the economy moves broadly in line with the projections we released today, I think future discussions will focus on how long we keep the policy rate at 5 percent,” the central bank governor said, Tiff Macklem, during a press conference in Ottawa.

So the obvious question is when rates might start to fall. The Bank of Canada will say nothing on this.

“It’s important that we don’t give Canadians a false sense of accuracy,” Macklem told reporters.

Rates could start falling by summer, economists say

If you read the bank’s projections, you can probably put the pieces together yourself. The bank expects inflation to slow to 2.5 percent by the end of the year. He estimates that economic growth will remain close to zero percent but will not slide into a recession.

Most economists therefore expect the central bank to start lowering interest rates by the summer.

“We see no reason to change our call for a first cut (of a quarter point) in June and for the bank to exceed market expectations by achieving a total of 150 basis points of cuts by end of this year,” Avery said. Shenfeld, chief economist at CIBC Capital Markets, wrote in a note to clients.

“BMO’s call for a rate cut starting in June seems entirely reasonable at this time,” wrote Benjamin Reitzes, managing director of BMO Capital Markets.

Nathan Janzen, deputy chief economist at the Royal Bank of Canada, wrote to clients: “We expect slower price growth, alongside a weakening economic backdrop, to push the (Bank of Canada) to begin lowering gradually its key rate by the middle of the year. »

Trading investments known as swaps – a type of investment in which traders can essentially bet on where they think rates will be – implies that there is about a 97 percent chance that a decline rates to be expected by the Bank of Canada policy meeting on July 24.

WATCH | “We’re not there yet” in terms of rate cuts, says Tiff Macklem:

“We’re not there yet”: Bank of Canada governor questioned on rate cuts

Tiff Macklem says inflationary pressures need to ease further before the Bank of Canada can cut interest rates.

So what’s stopping the central bank from offering similar guidance?

“Well, (Macklem) has a bad track record with forward guidance,” said Jim Stanford, an economist and director of the Center for Future Work.

Inflation has caused interest rates to rise

From the early days of the COVID-19 pandemic, Macklem lowered interest rates and told Canadians they would remain weak for a long time.

“If you have a mortgage or you’re thinking about making a large purchase, or you’re a business and you’re thinking about making an investment, you can be confident that rates will stay low for a long time,” Macklem said. in July 2020.

Within months, inflation began to soar. Even then, many viewed the price rise as “transitory.”

By the summer of 2021, Consumer Price Index (CPI) inflation had exceeded the Bank of Canada’s 1-3% target window.

In a opinion article published in the Financial PostMacklem said prices are increasing due to the unique circumstances of the pandemic.

“All of these factors have driven up prices, but none of them are likely to last. So we should not overreact to these temporary price increases,” he wrote.

Rows and rows of houses are displayed.
Holders of adjustable-rate mortgages bore the brunt of the interest rate hike initially, but 2.2 million other mortgage holders are preparing to renew at higher rates over the next two years. coming years. (Lars Hagberg/The Canadian Press)

Of course, prices continued to rise. In June 2022, the CPI peaked at 8.1 percent and the Bank of Canada began one of the most aggressive interest rate hike cycles in its history.

Rising rates have weighed on indebted households and businesses. Holders of variable rate mortgages were hardest hit at first, but another 2.2 million mortgage holders prepare for renewal at higher rates over the next two years.

These households are waiting, some desperately, to know when they can expect a break.

The central bank faces “a delicate balance”

Macklem said providing specific measurements or an exact date would not be helpful.

“I’m concerned that putting it on a timetable is a false sense of precision. We’re going to have to see how inflation plays out,” he said Wednesday.

WATCH | The Bank of Canada releases its Monetary Policy Report:


Message missteps aren’t the only thing weighing on policymakers.

“It’s a delicate balance,” said Jeremy Kronick, associate vice president of the CD Howe Institute. “We’ve never seen a tightening cycle like this.”

There are real risks in telling Canadians that the coast is clear before it is entirely clear that inflation is actually under control, said Kronick, who is also director of the Center on Financial and Monetary Policy. the institute.

Karl Schamotta, chief market strategist at Toronto financial services firm Corpay, said Macklem “may not want to keep hitting the brakes, but he also sees the danger of stepping on the accelerator.”

But Schamotta said there is a bigger issue at play here.

“Beyond that, one would hope that central bankers have gained a sense of humility over the past few years,” he said in an email. “Committing to a future path of action simply does not make sense when it is clear that we do not have a good handle on what drives the Canadian and global economies.”

Two people are shopping in a grocery store.
Food prices were among those that began to rise during the COVID-19 pandemic. In June 2022, inflation peaked at 8.1 percent and the bank began one of the most aggressive interest rate hike cycles in its history. (Graham Hughes/The Canadian Press)

And there is no doubt that the world is plunged into uncertainty. Wars rage in Europe and the Middle East, shipping lanes are under attack, and climate-related disasters are ravaging global production.

So forecasts can make bold statements about what might happen next, but for now at least, the Bank of Canada will be content to say that the trends are encouraging and that progress is being made. He won’t, however, set a date for interest rate policy changes until he is satisfied the job is done.

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