Posthaste: Why these economists think the Bank of Canada might ...

The Bank of Canada made it quite clear Wednesday when it held its interest rate steady at 5 per cent for the fifth session in a row that it is too early to talk about cuts.

Article content

“Today’s decision reflects governing council’s assessment that a policy rate of five per cent remains appropriate. It’s still too early to consider lowering the policy interest rate,” governor Tiff Macklem told reporters in a press conference after the decision.

Article content

Inflation remains the sticking point and while the central bank acknowledged some progress — headline inflation eased to 2.9 per cent in January — it wasn’t enough.

Core inflation in January remained above 3 per cent and the share of items in the consumer price index basket still running hot are above historical averages.

“The council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” the bank said in its statement.

So we wait. Most economists still expect the first cut in June, but after Wednesday’s decision, markets pared their bets on that timing. A cut for July is still fully priced in.

Others think even that is optimistic.

There are three more inflation readings to come before the bank’s June meeting, and Laurentian Bank economists Sebastien Lavoie and Salim Zanzana think neither February nor March data will show sufficient cooling.

Overall inflation may ease to 2.5 per cent in April, but core inflation might not cool enough for the central bank to cut in June, as Laurentian had been expecting.

Article content

Article content

Moreover, the Bank of Canada’s business survey in February showed that more companies planned to increase prices in the first quarter of 2024, a halt to progress on the normalization of corporate pricing behaviour, a factor the bank looks at, said the economists.

“As such, a first policy rate cut in July or September appears more suitable given recent economic conditions and the near-term path, considering the risk of under- and over-shooting monetary policy,” they said.

The Laurentian economists also think the reduction in rates in the second half of the year could be less than expected,  75 basis points rather than 125 bps.

Governor Macklem had this to say on the pace of cuts when asked about it by a reporter Wednesday: “I think it’s very safe to say we’re not going to be lowering rates at the pace we raised them.”

For Derek Holt, head of Capital Markets Economics at the Bank of Nova Scotia, Wednesday’s decision confirmed what he has been saying for awhile: no cut until September “and a lot has to go right to even get to that.”

The bank’s short statement, leaving the last paragraph intact, shows it is “clearly on the sidelines” and has ruled out any near-term easing, he said in a note.

Article content

“The opening remarks continued to flag that ‘underlying price pressures persist’ and Governing Council is ‘concerned about the persistence of underlying inflation’ amid ongoing ‘upside risks to inflation.’ Macklem said ‘Looking ahead, we continue to expect inflation will be close to 3 per cent through the middle of the year before easing in the second half,” said Holt.

“None of that is the language of a central bank moving toward easing anytime soon.”

Answering questions after the decision, Macklem did allow that a housing market surge this spring and big spending announcements in upcoming provincial and federal budgets could affect inflation and thus their rate decisions.

Mortgage analyst Robert McLister’s take is that the Bank of Canada might not see the inflation progress it needs until late in the second half if:

“the housing market turns up the heatthe Liberals open their spending taps wider in the new budget, orexcessive wage growth doesn’t simmer down.”

“To sum up, StatsCan’s March 19 and April 16 CPI releases better bring us good news on inflation, or it’s group therapy time,” he wrote.

Article content

 Sign up here to get Posthaste delivered straight to your inbox.

National Bank of Canada

Montreal’s housing market is off to strong start this year. National Bank of Canada economists estimate that home sales jumped 13.9 per cent in February from the month before. On an annual basis, sales were up 30 per cent.

The gains put sales at their highest level since April 2022, but are still lower than pre-pandemic levels.

Today’s Data: Canadian building permits, international merchandise trade for January, U.S. trade balance and consumer creditEarnings: Paramount Resources Ltd., Costco Wholesale Corp

Canadian pensions face new call to invest at home, this time from major business leadersOilsands producer fires back at Trudeau government over federal carbon capture incentivesFinancial anxiety continues to grip Canadians, but there are ways to combat it

Recommended from Editorial

Mortgage delinquency rates in Ontario and B.C. soar

Canada's GDP numbers not as good as you think

Financial anxiety continues to grip Canadians, with half of those under 55 worried about losing their jobs, but experts say there are ways to combat it. They advise more planning — and a little compassion. Find out more

Article content

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at [email protected] with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers led by Julie Cazzin or one of our columnists can give it a shot.

McLister on Mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Read them here 

Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at [email protected].

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content