In its recent announcement, the Bank of Canada (BoC) opted to keep its benchmark interest rate at 5%. This decision aligns with the ongoing economic changes, marked by rising annual inflation, which reached 3.4% in December last year. Despite these numbers, there's a consensus among economists that the Canadian economy is slowing.

BoC Governor Tiff Macklem highlighted a shift in conversations at the central bank. Instead of questioning whether interest rates are high enough, the focus has shifted to understanding how long current rates need to be maintained. This marks the fourth consecutive hold from the central bank.

Experts anticipate that rate cuts may start between spring and summer of 2024. Macklem, however, cautioned that rates could still rise if inflation doesn't cooperate.

Economists Predict Recession Amid Economic Slowdown

While Canada might not be in a recession currently, economists forecast a looming economic downturn in the first half of 2024. This prediction is based on the cumulative impact of aggressive rate increases.

The anticipated slowdown is expected to affect various economic aspects, including declines in investment and exports, a weakening U.S. economy, and an increase in unemployment rates. Consumers grappling with higher mortgage payments in a high-interest rate environment are likely to reduce spending, contributing to the economic squeeze.

Implied Probability of Rate Cuts

Looking ahead, the BoC's next meeting is scheduled for March 6th. The implied probability of a rate cut at that meeting, based on overnight index swaps, is currently at 15.5%. Implied probabilities and rates for all the BoC meetings this year are below, this has proven to be a very popular table. As always, implied probabilities are tools with some predictive capacity, but caution is advised as they come with uncertainties.

Bank of Canada's Dilemma: To Cut or Not to Cut

The recent decision by the Bank of Canada to hold its benchmark interest rate didn't surprise many, but it marked a shift in conversation. The central bank acknowledged the impact of higher interest rates on spending, signaling a change in the economic landscape.

Countdown to Rate Cuts

Despite inflation concerns, economists are shifting their focus from predicting rate hikes to anticipating rate cuts. The consensus is that the countdown to rate cuts has begun. Market indicators suggest that the Bank might start cutting rates as early as the April meeting.

Bank of Montreal's chief economist, Douglas Porter, notes, "It's safe to say that the countdown clock to rate cuts has begun, even if the Bank isn't saying so."

What Will Trigger Rate Cuts?

For the Bank of Canada to consider rate cuts, several factors need alignment. Randall Bartlett, Desjardins' senior director of Canadian economics, suggests the Bank may wait to see the unemployment rate at 6.5% and inflation at or below 3% before initiating cuts, potentially starting as early as April 2024.

However, opinions differ. Stephen Brown from Capital Economics believes the first cut could come in March, with more substantial cuts throughout 2024, exceeding market expectations. Capital Economics predicts a 200 basis points reduction, bringing the central bank's rate to three percent by the end of the year.

CIBC economists project a bit later easing in June but anticipate a deeper cut for the year than markets. They predict the overnight rate to be at 3.5% by the end of 2024, 150 basis points lower than the current rate.

Bank's Cautious Approach

BMO's Porter suggests that the Bank of Canada, aiming to restore credibility in the inflation fight, might wait as long as possible before adopting a dovish stance. He notes, "We suspect that while the underlying trend in inflation will improve in 2024, there will be bumps along the way, keeping the Bank on hold a bit longer than the market currently anticipates."