Canadian households, battered by nearly two years of rising prices and soaring interest rates, will have to wait a little longer for borrowing costs to ease.
The Bank of Canada kept its key overnight lending rate unchanged at 5% on Wednesday, citing concerns that underlying inflation persists and that the economy declares victory too soon, forcing a retreat.
But the central bank said it had shifted its focus to how long interest rates should remain high, rather than whether they were high enough.
“If the economy continues broadly in line with our forecasts that we released today, we expect there will be a discussion going forward about how long we will keep interest rates at 5%,” central bank President Tiff Macklem said at a news conference in Ottawa. Ta.
The obvious question, then, is when will interest rates start to fall? The Bank of Canada won’t say anything about that.
“It’s important that we don’t give Canadians a false sense of accuracy,” Macklem told reporters.
Interest rates could start falling by summer: The Economist
If you read the bank’s predictions, you can probably put the pieces together yourself. The central bank expects inflation to slow to 2.5% by the end of the year. Although the economic growth rate will remain close to 0%, I do not think we will fall into a recession.
Most economists therefore expect the central bank to start cutting interest rates by the summer.
“I see no reason to change the original request.” [quarter-point] With rate cuts scheduled for June, the bank will exceed market expectations by cutting rates by a total of 150 basis points by the end of this year,” Avery Shenfeld, chief economist at CIBC Capital Markets, told clients. I mentioned this in my notes.
“BMO’s request to start cutting rates in June seems perfectly reasonable at this point,” said Benjamin Reitzes, managing director at BMO Capital Markets.
Nathan Janzen, assistant chief economist at Royal Canada Bank, wrote to clients: [Bank of Canada] “We will begin a gradual reduction in policy interest rates by the middle of the year.”
Trading an investment known as a swap – a type of investment that allows traders to essentially bet on what interest rates will be – suggests that the chances of a rate cut coming before the Bank of Canada policy meeting on July 24 are about the same. It suggests that it is 97%.
Tiff Macklem said inflationary pressures need to ease further for the Bank of Canada to cut interest rates.
So why can’t central banks provide similar guidance?
“good, [Macklem] “We have had bad experience with forward guidance,” said Jim Stanford, an economist and director of the Center for Future Work.
interest rates rose due to inflation
Back in the early days of the COVID-19 pandemic, Macklem lowered interest rates and told Canadians they would remain low for a long time.
“If you have a mortgage, are considering a major purchase, or are considering investing in a business, you can be confident that interest rates will be low for an extended period of time,” Macklem said. In July 2020.
Within months, inflation began to soar. Still, many people dismissed the rise in prices as “temporary.”
By summer 2021, consumer price index (CPI) inflation had breached the Bank of Canada’s target window of 1-3%.
in Editorial published in Financial PostMacklem said the unique circumstances of the pandemic are driving up prices.
“All of these factors have pushed prices higher, but none are likely to last long, so we shouldn’t overreact to these temporary price increases,” he said.
Of course, prices continued to rise. By June 2022, the CPI peaked at 8.1% and the Bank of Canada began one of the most aggressive rate hike cycles in history.
Rising interest rates have put pressure on debt-laden households and businesses.Adjustable rate mortgage holders bore the brunt early on, but other 2.2 million mortgage holders preparing for renewal Higher interest rates are likely to apply within the next two years.
Some of these households are desperately waiting to know when they can take a day off.
Central banks face a ‘difficult balance’
Macklem said providing specific metrics or exact dates is not helpful.
“I’m worried that it’s a false sense of accuracy to put it on the calendar. We’ll have to wait and see how inflation develops,” he said Wednesday.
Watch | Bank of Canada releases monetary policy report:
It’s not just the wrong messages that weigh on policymakers.
“It’s a difficult balance,” said Jeremy Kronick, deputy director of the CD Howe Institute. “I’ve never seen a tightening cycle like this before.”
Kronick, who is also director of the institute’s Monetary and Monetary Policy Center, said there is a big risk in telling Canadians the coast is clean before it is sufficiently clear that inflation is actually under control. Ta.
Carl Schamotta, chief market strategist at Kopay, a financial services firm in Toronto, said Macklem “may not want to keep his foot on the brake, but he also recognizes the dangers of keeping his foot on the gas.” Ta.
But Sciamotta said there’s a bigger problem here.
“More than that, we hope that central bankers have imbibed a sense of humility over the past few years,” he said in an email. “It makes no sense at all to commit to a future course of action when it’s clear we don’t fully understand what’s driving the Canadian and global economies.”
And there is no doubt that the world is full of uncertainty. Wars rage in Europe and the Middle East, shipping routes are under attack, and climate-related disasters are wreaking havoc on global production.
So while this forecast can make bold claims about what will happen next, at least for now, the Bank of Canada will only say that trends are encouraging and progress is being made. However, the Bank does not plan to specify a date for changing its interest rate policy until it is confident that the work on changing its policy is complete.
