All eyes on BoC this week for hints on plans to cut interest rates

OTTAWA — As the Bank of Canada gears as much as announce its subsequent rate of interest determination Wednesday, economists might be looking out for any clues on when it plans to start out chopping rates of interest. 

Overall, Wednesday shouldn’t carry any large surprises. The central financial institution is extensively anticipated to proceed holding its key rate of interest regular at 5 per cent, the identical because it has at its final three rate of interest bulletins. 

But because the economic system continues to sluggish and forecasters anticipate a gentle decline in inflation, economists are eagerly waiting for indicators from the Bank of Canada that it’s able to pivot. 

“What I’m looking for is what I would call the next step,” mentioned Dominique Lapointe, a worldwide macro strategist at Manulife. “By the next step, I mean acknowledging that the rate hikes are done.”

So far, the Bank of Canada has not dominated out the potential for elevating rates of interest once more if inflation doesn’t co-operate. But forecasters don’t consider one other fee hike is definitely on the desk. 

Nathan Janzen, RBC assistant chief economist, says that though the central financial institution may nonetheless preserve the door open to extra fee hikes on Wednesday, it’s “unlikely that they’ll need to exercise that option.”

The Bank of Canada is predicted to chop rates of interest as early as this spring to be able to keep away from a sharper financial downturn than is important to battle inflation. 

Over the final 12 months, the  Canadian economic system has stagnated as borrowing prices have weighed on companies and shoppers. This weaker progress has translated right into a much less frothy labour market with fewer job vacancies and a better unemployment fee of 5.8 per cent.

The Bank of Canada’s lately launched business outlook survey discovered labour shortages are now not a prime concern, and as a substitute companies are fearful about slowing gross sales. 

Its client expectations survey discovered Canadians are additionally pulling again on their spending as larger rates of interest drive mortgage holders to chop on bills to be able to afford bigger month-to-month funds. 

This pullback in client spending is predicted to relax the economic system even additional this 12 months. 

Manulife’s financial outlook for 2024 suggests the economic system will shrink within the first half of the 12 months earlier than rising once more. 

“It’s going to be a weak year, regardless (of whether) we get a technical recession,” Lapointe mentioned. “The question will be, how long will this slowdown be? And can we get sustainable recovery in the second half of this year?” 

He added that the anticipated bounceback within the second half of the 12 months hinges on rate of interest cuts.

But the Bank of Canada isn’t anticipated to start out discussing fee cuts simply but, significantly since inflation rose final month. 

Canada’s annual inflation fee picked as much as 3.4 per cent in December, whereas underlying worth pressures did not ease. Lapointe says the truth that core measures of inflation — which strip out volatility in costs — picked up final month poses a communication problem for the central financial institution. 

“I think it’s a problem for the Bank of Canada — it’s a problem for the consumers too — in the fact that it does suggest that price pressure(s) on the core front are more persistent than we thought. And this is probably complicating their messaging next week,” he mentioned. 

The Bank of Canada has beforehand acknowledged that the journey again to 2 per cent inflation will include some bumps alongside the best way. Governor Tiff Macklem has mentioned that the central financial institution received’t be responding to every hiccup, however as a substitute will reply to constant developments. 

“We still think the most likely path for inflation is lower. The economy looks softer, the monthly inflation data will bounce around, but generally has been trending lower,” mentioned Janzen. 

In addition to its rate of interest announcement, the Bank of Canada might be publishing its quarterly financial coverage report on Wednesday. The report will embrace new forecasts for the economic system and inflation.

In October, the Bank of Canada was projecting inflation would fall again to 2 per cent in 2025.