Interest Rate Cuts Likely “Over The Course Of This Year”: Bank of Canada

The Bank of Canada (BoC) released its latest summary of deliberations this week, and, in a welcomed turn of events, has finally given Canadians a clue about rate cuts to come.

Although the Bank maintained earlier this month (as it has for some time) that it’s “still too early to consider lowering the policy interest rate” (and that was said ahead of the March rate decision, which saw the Bank hold at 5% for the fifth time in a row), it also said that “recent inflation data suggested monetary policy is working largely as expected,” which bodes well for cuts to come.

“[Governing Council] members agreed that if the economy evolves in line with the Bank’s projection, the conditions for rate cuts should materialize over the course of this year,” the Bank said. “However, there was some diversity of views among Governing Council members about when there would likely be enough evidence that these conditions were in place, and how to weight the risks to the outlook.”

In other words, the rate cut conversation is still very much so in flux — but cuts are likely coming.

As for the housing piece of the puzzle, the BoC said on Wednesday that Governing Council has “expressed concern that the housing market continued to pose upside risks to the inflation outlook,” and that members “discussed how they should consider the impact of persistently high shelter cost increases, which could make it more difficult to get inflation all the way back to 2%.”

The bank also said that they recognize that rate hikes “have pushed up mortgage interest costs,” which have, in turn, driven up shelter price inflation. They expect higher mortgage interest costs to persist given the mortgage renewal cycle.

But the effect of that cycle won’t have a “permanent” effect on CPI inflation, the bank also said: “Members agreed that if mortgage interest costs were the only component holding up inflation, there could be some capacity to look through them, so as not to unduly restrain economic activity to get headline inflation back to 2%.”

“However, this was not the current situation,” it added. “Most components of shelter inflation, such as rent and expenses related to home ownership (including insurance, taxes, and repairs), were still rising significantly in January. Moreover, recent data had made it clear that inflationary pressures were still broad-based, and underlying inflation had yet to show sustained downward momentum.”

With all of this said, the consensus amongst experts is that a rate cut is coming — and sooner rather than later. BMO’s Douglas Porter says that a cut next month isn’t out of the question, while RBC’s Claire Fan forecasts that the first cut of the cycle will come by mid-year. Although BoC Governor Tiff Macklem and his gang are currently being quite coy when it comes to specific timings, they are expected to show their cards at some point before fall.