The economic situation appears to be improving Bank of Canada deliver interest rate But some economists warned that the central bank may have second thoughts about the right timing for its much-anticipated round of rate cuts.
The Bank of Canada has kept its policy rate — the benchmark rate for Canada’s main loans, such as mortgages, as well as borrowing costs for businesses and the government — at 5.0% since July 2023. Higher rates dampen consumption and slow growth, removing some of the inflationary momentum from the economy.
Governor Steve Macklem In its last interest rate decision, the central bank said In April, Fed Chairman Jerome Powell said a first rate cut at the Fed’s upcoming meeting in June was “within the realm of possibility.” He said it depended on whether the Fed inflation Economic indicators such as the Fed's monetary policy and the Fed's monetary policy continued to decline as expected by the Bank of Canada.
Since then, inflation has continued to ease. Data from April showed annual inflation had fallen to 2.7%. 2.9% in March, For example, the central bank's preferred measure of core inflation has also shown signs of slowing. This is despite persistent pressure on housing inflation, which has pushed up the headline inflation number.
Statistics Canada releases its latest real GDP report on Friday A bigger slowdown That was higher than most economists and the Bank of Canada had expected.
“What we're seeing is an economy that's struggling under the weight of high interest rates, while inflation has become fairly stable,” said James Orlando, head of economics at TD Bank.
“(Monetary policy makers) have absolutely enough economic reasons to lower interest rates. They’ve been doing that for a long time.”
Following the GDP report, financial markets raised the odds of a rate cut on June 5 to more than 80%. Many economists also firmly expect rate cuts to begin this week, but some are holding out for the first 25 basis point cut in July.
Economist: Waiting for a rate cut would be a 'policy mistake'
One data point the Bank of Canada's governing council is likely to focus on is a strong April employment reportThe data showed Canadian employers added a net 90,000 new jobs for the month.
Wage growth slowed to 4.7% from 5.1% the previous month, but the Bank of Canada has said the pace of wage increases may not be consistent with returning inflation to its 2% target.
But Orlando said the trend in the labor market is clear, and it has loosened significantly during the rate hike cycle. Wage growth, while still high, is a lagging indicator as Canadians take pay raises to catch up with rampant inflation, and he expects inflation to continue to cool in a “stagnant” economy.
Wednesday's rate cut would mark an important turning point in the Bank of Canada's efforts to combat inflation, which began in March 2022 and has seen the policy rate rise rapidly by 4.75 percentage points since then.
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Many Canadians have already renewed or are preparing to renew their mortgages under the new higher rates, which will increase their monthly payments and leave less room for spending elsewhere.
According to Statistics Canada, about 44 per cent of Canadians still cite money as their biggest stressor, up six percentage points from last year. FP Canada 2024 Financial Stress Index Released last month.
RSM Canada economist Tu Nguyen said Wednesday's rate cut is supported by economic evidence and will provide significant relief to consumers and businesses.
“We think it would be a policy mistake if the central bank continued to wait,” she told Global News. “All signs are setting the stage for the start of an easing cycle.”
Why the Bank of Canada might wait
But Orlando is among those who don't believe the Bank of Canada will act on Wednesday.
“While everyone is talking about the possibility of a rate cut this week, there is still a chance that it won't happen,” he said.
While financial markets last week were betting that the Bank of Canada would cut interest rates in June, he believes those odds underestimate the strength of the Canadian economy.
Statistics Canada said slow inventory accumulation was the biggest drag on Canada's economy in the first quarter of this year. But Orlando pointed out that without this drag, real GDP in the first quarter of this year would have grown by about 3% year-on-year, mainly due to consumer spending on services such as travel and dining out.
An Ipsos poll conducted exclusively for Global News last month found that Canadians Continue to raise funds for this summer's vacation Despite feeling the financial pressure.
Orlando sees this as a sign that Canadian consumers remain resilient despite rising interest rates. He said the Bank of Canada was likely “spooked” by what happened in the U.S. earlier this year, when a rise in services spending reignited inflation that had been cooling.
Orlando said that because the economy is not in a technical recession and consumers are still spending, the Bank of Canada can choose to keep interest rates on hold for a while before considering cutting them. Doing so can give the central bank confidence that the course of inflation so far will not be affected and avoid having to re-implement tightening policy.
“The economy hasn’t fallen off a cliff,” Orlando said. “That gives the Bank of Canada options when it comes to deciding when to cut rates. It can do it this week, it can wait until July, or even longer if it really wants to.”
Nguyen doesn’t think any progress the Bank of Canada has made in controlling inflation would be threatened if it cuts rates on Wednesday. She said the 4.75 per cent policy rate is still “very tight” and won’t change the financial situation of many Canadians or businesses enough to trigger a new wave of spending.
Nguyen said cutting rates now simply signals to Canadians that they can start planning for a future lower interest rate environment.
“While interest rates remain restrictive, it sends a signal to Canadian households and businesses that an economic recovery is about to begin,” she said. “There is light at the end of the tunnel.”
Signals may be as important as cuts
Signaling future moves and helping Canadians plan ahead is an important function of a central bank. While Nguyen believes the April rate decision and its apparent progress in fighting inflation opened the door for a rate cut in June, Orlando is still expecting more cuts.
He argued that the Bank of Canada has “historically been quite transparent,” signaling future moves before actually taking them, to avoid surprising Canadians or roiling financial markets.
He believes monetary policymakers will likely use the June meeting to “prepare” for a rate cut in July, when the central bank will also release a new monetary policy report that will include revised forecasts for inflation and economic growth.
Orlando said that apparent certainty, even without an actual rate cut, could have a easing effect on the economy by setting expectations.
Forecasts of future rate cuts are already priced into Canada’s bond market, including the benchmark five-year Government of Canada bond, which helps determine the interest rate on a five-year fixed mortgage.
Orlando explained that falling interest rates could provide a soft start of sorts for economic recovery by informing Canadians how much they will pay on new or renewed mortgages or auto loans, or how much return businesses will get on planned investments.
Whether the Bank of Canada cuts its benchmark interest rate on Wednesday or sends a clear signal of future rate cuts, it will likely have an impact on the housing market because marginalized homebuyers and sellers will have a clearer picture of what they can afford, Orlando said.
Both Orlando and Nguyen said they don’t expect a rate cut of just a quarter percentage point will change the affordability outlook for many buyers looking to enter the housing market.
But Orlando said the demand that may have emerged from this spring's slower housing market performance could be delayed until the summer, depending on whether Canadians get a clear sense that borrowing costs will fall in the coming months.
“I don't think a quarter percentage point is really a determining factor. I think interest rates are definitely coming down and will continue to come down, and that's really a signal that people need to decide whether they want to get in,” Orlando said. “So this summer could be a really important time for the Canadian housing market.”
