The world has changed a lot since the Bank of Canada last met to decide on rates, observed one economist recently.
A banking crisis sparked turmoil in the financial system, OPEC+ announced a surprise supply cut, raising the spectre of higher inflation, and economic data in Canada came in stronger than expected.
Despite these forces pulling in different directions, almost all economists believe Canada’s central bank will hold its rate at 4.5 per cent tomorrow.
While global banking turmoil tilts to the dovish side, the economy’s strong start to the year suggests it is too soon for the Bank to take hikes off the table.
“Look for policymakers to again signal that they intend to leave the policy rate on hold and quantitative tightening on autopilot until they get inflation back down to 2 per cent,” said Royce Mendes, head of macro strategy at Desjardins.
Mendes said Tiff Macklem and his team will probably stress yet again that the risk of hikes remains higher than cuts, “but that’s probably just tough talk.”
“All in all, while the world has changed a lot since the last Bank of Canada announcement, the narrative from central bankers will be a familiar one — patiently waiting for past policy moves to work their magic.”
How much time is up for debate.
Economists at Capital Economics believe the Bank’s next move will be an interest rate cut in October.
Capital thinks the strong start to the year will not be sustained, with the first-quarter Business Outlook Survey supporting the Bank’s view in January that economic activity is likely to stall in the middle of 2023.
Inflation, meanwhile, has cooled more than the Bank expected, on track to average 5.2 per cent in the first quarter, lower than its forecast of 5.4 per cent.
Capital believes that core inflation will fall sharply this year as the economy enters a modest recession, leading to rate cuts before the end of the year.
It expects the first one in October, followed by 25-basis-point cuts at most meetings until the rate reaches 2.5 per cent in mid-2024, which is a little earlier than markets are predicting.
Carlos Capistran, of BofA Global Research, however, believes the Bank of Canada will remain on hold for the remainder of 2023.
Job numbers came in strong in March with a gain of 34,700, more than double expectations. Capistran says while there are signs of softening in goods-producing industries which it expects to continue as the economy decelerates, the labour market remains tight.
“In the short-term risks remain skewed to the upside as the labour market is still tight. It is too early to think about cuts in Canada,” Capistran wrote in a recent note.