The Bank of Canada kept its benchmark interest rate unchanged on Wednesday, continuing to warn that future rate hikes are not off the table, even as market watchers turn their attention to a rate cut in 2024.
The central bank has kept the policy interest rate unchanged at 5.0% in the third consecutive decision and final rate announcement in 2023.
In a statement announcing the widely expected hold, the Bank of Canada cited a weakening economy and easing price pressures such as consumer spending as signs that tight monetary policy is having an effect in curbing inflation.
Overall inflation fell sharply to 3.1% in October from a peak of 8.1%. Meanwhile, Canada’s economy contracted in the third quarter with a sharper-than-expected drop.
However, the Bank of Canada Board of Directors has decided that if there are no signs of further progress in the Bank of Canada’s core inflation indicators and other factors such as wage growth, inflation expectations, and consumer price-setting behavior, “We remain prepared to raise interest rates further.”
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The central bank has raised its policy interest rate by 4.75 percentage points since March 2022 in an effort to slow economic growth, curb consumption and dampen demand, while also making mortgages and other loans more expensive for Canadians.
Eastern Canada’s Governor Tiff Macklem said in a speech last month that the “excess demand” that was driving inflation had been removed from the economy, a phrase echoed in Wednesday’s statement.
Benjamin Reitz, Canadian rates managing director and macro strategist at BMO Capital Markets, told Global News that inflation could indeed “decline” in the coming months, with expectations for the economic slowdown to continue. said that it was high.
“But that doesn’t mean it’s going to be a straight line.” , warned.
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Reitzes said the economy could recover stronger than expected or a global shock in oil prices could force central banks back on the sidelines to rein in inflation expectations.
The Bank of Canada also noted on Wednesday that pressure on the haven component of the consumer price index is increasing even though overall inflation is slowing.
Canada’s once-tight labor market has recently shown signs of easing, as employment growth has not kept up with rapid population growth and the unemployment rate is rising. However, the Bank of Canada cautioned that it continues to monitor annual wage growth rates in the 4-5 per cent range.
Reitz said rising wages are a “huge risk” to Canada’s inflation outlook right now, especially given a Statistics Canada report released Wednesday showing productivity has declined nationally for the sixth consecutive quarter. He said that.
Lower productivity and higher wages mean it costs more for Canadian businesses to produce goods and services, which he describes as “inflation.”
Macklem has warned in the past that wage increases are not consistent with returning inflation to 2% unless accompanied by productivity gains.
When will interest rate cuts start?
Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note to clients Wednesday morning that while the Bank of Canada “celebrated a small victory” on the inflation front with its latest decision, there are concerns about the possibility of higher interest rates. He said he was not yet ready to stop warning. Also.
“However, the current trend is clearly moving away from that, and the central bank’s agreement with broad progress in combating inflation, and the fact that the economy is no longer clearly overheating, suggests that the central bank is unlikely to consider further tightening at this point. “It suggests you haven’t thought much about it,” he said.
Wrights also said he was not taking the Bank of Canada’s threat to raise rates “very seriously,” although further inflation shocks are possible and rate hikes could be on the table again.
“At this point, it looks like Canada’s next move will probably be lower, not higher,” he says.
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In Reitzes’ view, the World Bank’s warning is meant to reassure Canadians that it will do everything it can to get inflation back to its 2 per cent target after a long period of price pressure.
He said the Bank of Canada’s focus remains until monetary policy makers see a series of inflation rates in the mid-2% range, giving them confidence that the Bank of Canada can put the brakes on the tightening cycle. We do not expect any rate cuts.
“That’s not likely to happen until some point in the second quarter,” Reitzes said. “If we don’t get these favorable inflation numbers, it could even be postponed until the third quarter.”
Royal Canada Bank economist Claire Huang also said in a note to clients on Wednesday that she expected cuts to begin in the second half of 2024, but that a sharp economic downturn could push that timeline forward. Stated.
Canada’s other big banks are more ambitious in their outlook for rate cuts.
TD Bank announced Wednesday that the Bank of Canada’s first rate cut could come as early as April.
CIBC’s announcement came a little late, with Schenfeld saying on Wednesday that the bank was considering cuts starting in June. However, CIBC forecasts that the policy rate will fall by 1.5 percentage points by the end of 2024.
According to Reuters, money markets are already hinting at the possibility of a rate cut by March, with a full 25 basis point (bp) cut expected in April.
As BMO Chief Economist Doug Porter said in a note Wednesday, “The countdown clock to rate cuts has begun, even if the banks aren’t saying so.”
How will the housing market react in the new year?
Scotiabank chief economist Derek Holt said in a note Wednesday that the Bank of Canada cannot withdraw its guidance on a possible rate hike without flooding financial markets with rate cut bets.
Holt noted that bond markets are already pricing in rate cuts next year, with the key five-year Canadian government bond yield reversing an early fall rally and now at its lowest level since May.
Bond yields affect fixed-rate mortgages offered by Canadian financial institutions, and lower yields signal higher interest rates for homebuyers and homebuyers renewing their mortgages.
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Holt said government five-year bond yields are falling as Canadians finalize pre-approval mortgages to buy homes in the new year. On top of that, Canadians have largely gained jobs this year, bringing higher wages, putting many in a good position in what will likely be a crowded spring housing market.
Meanwhile, Wrights notes that many Canadian housing markets remain buyer-friendly, with rising interest rates and increased supply limiting competition and keeping sales “soft.”
He expects these trends to continue through the winter and spring, with housing activity and prices “bottoming out” and beginning a “recovery” in the second half of next year.
If Bank of Canada interest rates start to fall, that could spur a market rally, but Wrights said that would only likely happen if the economy worsens further, and if incomes take a hit. He points out that many buyers may return to the sidelines.