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."