Photo: Canadian Press
As the Bank of Canada prepares to announce its next interest rate decision on Wednesday, economists will be watching for any clues as to when rates will begin to cut.
Overall, there shouldn’t be any major surprises on Wednesday. The central bank is widely expected to keep its key interest rate unchanged at 5%, the same as in the past three rate announcements.
But as the economy continues to slow and inflation forecasters expect inflation to decline steadily, economists are eagerly watching for signs that the Bank of Canada is ready for a policy shift.
“What I’m looking for is what I would call the next step,” said Dominique Lapointe, global macro strategist at Manulife Life Insurance. “The next step means acknowledging that the rate hike is done.”
So far, the Bank of Canada has not ruled out raising rates again if it fails to tackle inflation. But forecasters don’t think another rate hike is actually on the cards.
Nathan Janzen, assistant chief economist at RBC, said while the central bank could still leave the door open for another rate hike on Wednesday, “it is unlikely that it will need to exercise that option.”
The Bank of Canada is expected to cut interest rates as early as this spring to avoid a sharper economic downturn than is necessary to combat inflation.
Canada’s economy has stagnated over the past year as borrowing costs weigh on businesses and consumers. This slowdown in growth led to a less frothy labor market, fewer job openings, and an increase in the unemployment rate to 5.8%.
Labor shortages are no longer a top concern, with businesses instead worried about weaker sales, according to the Bank of Canada’s recently released Economic Outlook Survey.
The company’s consumer expectations survey found Canadians are also cutting back on spending as rising interest rates force mortgage holders to cut back on spending to meet higher monthly payments.
This slump in consumer spending is expected to cause the economy to cool down further this year.
Manulife’s 2024 economic outlook suggests the economy will contract in the first half of this year and then grow again.
“Whether we’re in a technical recession or not, this is going to be a weak year,” Lapointe said. “The question will be how long this economic slowdown will last and whether we can achieve a sustainable recovery in the second half of this year.”
He added that the expected recovery in the second half of this year is dependent on rate cuts.
However, the Bank of Canada is not expected to start discussing interest rate cuts just yet, especially since inflation rose last month.
Canada’s annual inflation rate rose to 3.4% in December, but underlying price pressures did not ease. Lapointe said the fact that the core inflation measure, which strips out price fluctuations, rose last month presents a communication challenge for the central bank.
“I think this is an issue for the Bank of Canada, but it’s also an issue for consumers because of the fact that it suggests that price pressures in core areas are persisting more than we thought. And , this is probably complicating their policy’ message next week,” he said.
The Bank of Canada has previously acknowledged that there will be some difficulty getting back to 2% inflation. Governor Tiff Macklem said the central bank would respond to consistent trends rather than one problem at a time.
“We still think the most likely path for inflation is down. The economy looks soft and the monthly inflation numbers will improve, but the overall trend is down,” Janzen said.
In addition to the interest rate announcement, the Bank of Canada is scheduled to 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 predicted that inflation would fall to 2% by 2025.