Fri. Feb 23rd, 2024

Analysis | So, a rate cut in March, April or June?

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The governor of the Bank of Canada, Tiff Macklem, was careful not to reveal the precise intentions of the institution as for interest rates.

  • Gérald Fillion (View profile)Gérald Fillion

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The central bank no longer threatens Canadians with a future increase in the key rate, that’s already a win! In its decision rendered on Wednesday, it withdrew the words used in early December, when the Council still said it was “ready to increase the key rate again if necessary”. The removal of these words is the starting signal for the start of rate cuts. The big question is when.

In a press briefing on Wednesday, the governor of the Bank of Canada said that he was not ready to start the discussion on a rate cut. We need to see all major inflationary indicators fall sustainably before considering a rate cut, he said.

However, if there is one thing that the governor will never say clearly, it is the precise intentions of the central bank. At each press briefing, we beat around the bush so as not to confuse citizens' expectations. Lots of psychology, a largely philosophical discourse on pressures, perceptions, forces present.

We must therefore read in the tea leaves to analyze the governor's speech and between the lines of the central bank's press release to try to grasp what is coming. Forecasters from financial institutions are masters of the matter, but the governor's speech remains airtight to the point that economists do not completely agree on the projections.

According to CIBC, the Bank of Canada is not yet willing or able to ease interest rates. That said, the bank is no longer asking whether rates are high enough, but how much longer to keep the key rate at 5%.

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CIBC economists believe that the central bank will wait until June to announce a first cut. But it could cut its rate more aggressively next, perhaps by half a percentage point in July. The key rate is expected to rise from 5% to 3.5% by the end of the year, according to CIBC.

At the National Bank, we believe that the Bank of Canada will act in the spring. The institution's economists say the bank's statement is slightly more dovish than we expected, and the change in stance moves the process toward a possible pivot in key rates. Our reading of this statement gives us a little more confidence in our call for a rate cut in April.

At Desjardins too, we are banking on month of April.

According to the Bank of Canada, reducing immigration thresholds into the country could help ease pressure on rent costs. The Central Bank Board of Directors makes a direct link between immigration and rents. The rapid growth of the population leads to an increase in demand for rentals, which puts pressure on the rents offered in the market, especially since the level of construction is not high enough.

At a press briefing Wednesday morning, the first deputy governor of the Bank of Canada, Carolyn Rogers, said that, over the past year, we have experienced particularly significant demographic growth thanks to immigration. This came at a time when there were supply constraints. This can be seen very clearly in the housing sector, particularly in rents.

The National Bank also notes that the central bank placed emphasis in its analysis this week on the question of housing. Indeed, Bank of Canada models indicate that about 50% of inflation over the next two years is expected to be related to housing (28% of the CPI basket).

Fundamentally, economic growth is weak and will remain so during the first half of 2024 in the country with, in addition, a supply which is considered slightly excess. The unemployment rate is rising. The high level of the key rate has an inflationary impact on mortgage interest and puts negative pressure on home construction projects, particularly in Quebec.

The Bank of Canada is also revising its forecasts. Its economic growth projection for 2024 fell from 1.2% last summer to 0.9% in October… then to 0.8% on Wednesday. The expected inflation rate at the end of 2024 is now 2.8%.

According to Desjardins, the Bank of Canada remains too optimistic in its economic projections. We expect a short, mild recession in Canada in the first half of 2024. Mortgage renewals continuing to occur at higher interest rates, slowing population growth and CEBA loan repayments will further cloud more of the already bleak outlook.

There are many arguments in favor of a rate cut sooner rather than later. But the bank is not giving up: we must beat inflation sustainably before starting the shift towards rate cuts. While it is true that the current level of interest rates creates pressure that may become untenable for certain households, French economist Thomas Piketty reminded us, in a recent interview with Zone économique, that A high level of inflation was equivalent to a tax increase for the poorest. Basic needs are becoming more and more expensive and it is less well-off households who are feeling the effects the most.

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