'All but rules out a cut in April': What economists say about the Bank of Canada's hold

Central bank’s statement strengthens view that first interest rate cut will come in June

Article content

The Bank of Canada held its benchmark lending rate at five per cent on Wednesday and gave little away in its official statement for when it might be ready to start cutting.

Here’s what economists are saying about the decision and where interest rates go from here.

Article content

‘Too early to cut’: Avery Shenfeld, CIBC Capital Markets

The Bank of Canada kept its cards close to its chest for the timing of interest rate cuts, Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note following the rate announcement.

Advertisement 2

Article content

“The Bank of Canada kept rates unchanged, and didn’t make any great leaps towards an actual rate cut today,” he said. “The overall message is that it’s too early to cut, and that they need to see more progress on inflation.”

On inflation, the central bank said there has been progress, but nonetheless stuck to its message that it remains “concerned” and wants to see further improvement, especially in its two preferred consumer price index measures — CPI-median and CPI-trim. Still, Shenfeld was surprised there was no mention of an inflation measure that strips out mortgage interest costs.

The economist now expects the Bank of Canada to provide clearer direction in April when it releases a new Monetary Policy Report, “which in addition to a fresh forecast, should show enough optimism in the battle against inflation to set markets up for a rate cut in June,” he said, “assuming the data in the coming month point in that direction.”

‘Far from normal’: Sebastien Lavoie, Laurentian Bank of Canada

Laurentian Bank of Canada is pushing its forecast for the first interest rate cut to July or September and cutting its call on the total reduction for the year to 75 from 125 basis points.

Article content

Advertisement 3

Article content

Sebastien Lavoie, chief economist, said in a note on the March 6 decision that the inflation situation is “far from normal,” with about 50 per cent of the items in the consumer price index basket increasing by more than three per cent.

“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,” he said.

Lavoie does not expect inflation to ease close to 2.5 per cent until at least April.

‘Economy … a risk’: Charles St-Arnaud, Alberta Central

Inflation is preventing the Bank of Canada from cutting interest rates, said Charles St-Arnaud, chief economist at Credit Union Alberta Central Ltd.

“The persistence in underlying inflation is most likely what is keeping the BoC from cutting its policy rate,” he said in a note following the rate announcement, noting the bank highlighted that it expects inflation to remain around three per cent for the first part of 2024, above its target of two per cent.

Given the central bank’s concern, St-Arnaud said it likely won’t start cutting until its preferred measures of core inflation are reliably below three per cent, something he doesn’t expect to happen until around May, meaning a possible first cut at the bank’s June meeting.

Advertisement 4

Article content

However, the economy is the wild card, he said, and could push the central bank to act: “A much weaker economy in 2024 is a risk that could force the BoC to move sooner.”

More cuts than markets expect: Stephen Brown, Capital Economics

The Bank of Canada didn’t deliver much in the way of clarity around interest rates, but that was to be expected, Stephen Brown, deputy chief economist for North America at Capital Economics Ltd., said in a note.

“There was never much chance of it making any wholesale changes to the statement today,” he said, adding that comments in the statement regarding inflation and from governor Tiff Macklem that interest rates still need time “to do their work” all but rule out a cut in April.

“Nonetheless, we continue to think it likely that the bank will cut interest rates further over the rest of this year than the 90 basis points of cuts currently implied by markets,” Brown said.

‘Rate cut in June’: Bryan Yu, Central 1

In holding interest rates at the current five per cent level, the Bank of Canada made it clear that any moves to cut will be “data dependent,” said Bryan Yu, chief economist at Central 1 Credit Union.

Advertisement 5

Article content

“We expect a rate cut in June as economic patterns falter,” he said in a note following the central bank’s announcement.

There is no shortage of weak economic indicators, Yu said, including “faltering domestic demand,” declining gross domestic product per capita and “sharply” declining business investment, which dropped for the sixth time over the past seven quarters, according to gross domestic product data released last week.

Recommended from Editorial

He said the costs of shelter will continue to challenge inflation goals, but “we expect the bank to “look through” shelter costs as it assesses the timing of a cut.”

‘Gifted a little more time’: James Orlando, TD Economics

The Bank of Canada was “gifted a little more time” to hold off on rate cuts after the economy eked out growth in the fourth quarter, said James Orlando, senior economist at Toronto-Dominion Bank Economics.

“With effectively no pressure for the BoC to respond, it can sit back and wait for a couple more inflation reports to roll in,” Orlando said in a note on the rate announcement.

Advertisement 6

Article content

He cautioned though that “markets don’t think the BoC can get too comfortable” with a rate cut at the bank’s June meeting 90 per cent “priced” — timing the economist agrees with.

The Bank of Canada cited worry about inflation throughout its rate-decision statement.

Orlando argues, however, that inflation is being driven by shelter prices. When they are excluded, inflation comes in at 1.6 per cent year over year, below the central bank’s target of two per cent.

“While the BoC isn’t ready to adjust course just yet, we think that the time for rate cuts is quickly approaching,” Orlando said.

• Email: [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