Sat. Mar 2nd, 2024

Even if, publicly, central banks are banking on caution, they will open up their game in the coming months and start talking about rate cuts.

Analysis | What to decode from the Bank of Canada's message?

Open in full screen mode

The Bank of Canada building, in Ottawa (Archive photo)

  • Olivier Bourque (View profile)Olivier Bourque

Voice synthesis, based on artificial intelligence, makes it possible to generate a spoken text from written text.

Many of us wanted a nice big gift from the Bank of Canada for Christmas: a clear message announcing rate cuts for the start of 2024. On the contrary, the institution opted for caution. during the announcement on its key rate and visibly “wanted to calm the heat”.

At the end of the institution's press release, we find this sentence which has the effect of a cold shower, especially for those who will have to renegotiate their mortgage in the coming months.

It is written that the Bank of Canada remains ready to increase the key rate again if necessary, a message far from paving the way for rate cuts. fast rates. But what is it really?

One ​​thing is certain, the institution is keeping all the cards in its hands, a strategy that surprises the economist and senator Clément Gignac.

The economy is slowed by rate hikes. Demand is less, consumption is stagnating. We also know that there has been progress in terms of inflation. So I find it surprising that we are still talking about the possibility of a rate increase, he assures in an interview with Radio-Canada.

LoadingPutin fight against loneliness and travel to the Middle East

ELSEWHERE ON INFO: Putin fights against loneliness and travels to the Middle East

For him, it is clear that the Bank of Canada wanted to temper the market and send the message that there is still work to be done, even if most of it has already been accomplished.

Open in mode full screen

The economist Clément Gignac

It's a message to curb enthusiasm, to manage risk. They really don't want to fuel inflationary expectations!

A quote from Clément Gignac

Same story with Hendrix Vachon, senior economist at Mouvement Desjardins.

We want to control expectations. We know that there will be rate cuts, but it is not yet the time for central banks to shout it from the rooftops, he says.

If the conclusion remains the same, the results are darker than in October, the time of the penultimate decision of the Bank of Canada. The economy slowed and even contracted in the third quarter, the unemployment rate increased, the number of job vacancies fell and consumption stagnated.

In addition, for the first time, the Bank of Canada indicates that the economy is no longer in a situation of excess demand. It is precisely this surplus that has played tricks on us in recent years.

If we read between the lines, that means that there are no longer any inflationary pressures. There, it remains to be seen the dynamics of wages, price setting, and the expectations of businesses and consumers, but it is a major point, assures Mr. Vachon.

Open in full screen mode

Food inflation has fallen but still remains high in the country. (Archive photo)

That said, even if, publicly, central banks are banking on prudence, they will open their game in the coming month. The economy will catch up with them and faster than they think, says Mr. Gignac.

In short, not every truth is good to tell… at least for the moment. However, over the next few weeks, tongues should start to loosen.

We can still see that there is more openness to talking about reductions, more timidly at the moment, it’s true. But the more data we have [according to which] the economy is slowing down, [as well as] the job market and inflation, there will be more and more central bankers who will openly display reductions in rate, argues Hendrix Vachon.

If you have to read between the lines of the Bank of Canada, economists are clearer on the subject: a drop rate could occur as early as the beginning of 2024.

There are those who are more optimistic like Clément Gignac. According to him, a first decline could even occur in January, following the next decision by the Bank of Canada. However, don't expect a significant decrease: it will probably be 25 basis points.

Everything will depend on the inflation rate. And if the unemployment figures are disappointing, the door could be wide open for the month of January. At that time, we will table an update of the monetary policy report and a press conference will follow. So, we could explain the change of course, believes Mr. Gignac.

We could also bet on the month of March, which would give more time at the Bank of Canada to transition to a pattern of rate cuts. This could also happen during next April's decision.

We are banking on spring, so the sequence would be this: in January, the Bank removes its mention of rate increases. In March, the tone would be more accommodating, which could [open] the way to a decline in April, says Hendrix Vachon.

Open in full screen mode

More than two million Canadians will have to renegotiate their mortgages over the next two years.

Last November, during an interview with Gérald Fillion, the senior economist of the National Bank, Stéfane Marion, also counted on a decrease in April.

The key rate could fall by 100 to 150 basis points during 2024, from 5% to 4% or 3.5%, which would reduce pressure on mortgage rates.

However, the institution should not wait too long before throwing in ballast. Rate hikes have not yet had their full effect on the economy. More than two million Canadians will have to renegotiate their mortgages over the next two years.

The risk would therefore be great if the central bank were to maintain such a restrictive policy, especially since a third of the effects of the increases are still to come, believe the experts consulted.

If they present us with a prediction of stagnation in 2024 when we have eliminated excess demand, we create excess supply. Given the delay in the full effect of rate increases and the impact on the economy, it will be high time to lower rates, believes Mr. Gignac.

The same analysis is done by Desjardins.

If inflation continues to decline in the coming months, that will mean that the rate of #x27;real policy interest [the policy rate minus inflation] is increasingly restrictive. It's going to need an adjustment.

So, see you on January 24.

  • Olivier Bourque (View profile)Olivier BourqueFollow

By admin

Related Post