Rate cuts may come in spring, experts say

Economists look ahead as Bank of Canada holds interest at 5 per cent

They’re standing pat for now — but are they getting ready to cut?

Surprising almost no one, the Bank of Canada announced Wednesday morning that it’s keeping its overnight lending rate at five per cent, and said the slowing economy is a sign its battle against inflation is working.

While the bank said it was prepared to raise rates again if needed, it was almost a half-hearted warning, and economists suggested the bank is likely to start cutting rates as soon as the spring.

“The next move is clearly a cut, with odds pointing to the first move in April,” TD senior economist James Orlando wrote in a research note after the bank’s decision was announced.

CIBC chief economist Avery Shenfeld agreed that a rate hike isn’t something the bank is actually planning on.

“The statement didn’t drop the earlier warning that additional rate hikes could still be in the offing if inflation fails to sufficiently cool.

But other signals in today’s announcement suggest that the bank isn’t really giving serious thought to the prospect of further rate hikes,” Shenfeld wrote.

The bank will start trimming rates in June, according to CIBC’s official forecast, said Shenfeld, and will cut the overnight rate to 3.5 per cent by the end of next year.

Wednesday was the third straight rate decision where the bank left its key rate alone, making this unofficial pause longer than the official “conditional pause” announced by the bank in January along with a hike of 25 basis points (a quarter of a percentage point).

After leaving the rate untouched at meetings in March and April, the bank raised it by 25 points in June and 25 points in July.

Since then, it’s stood at five per cent.

So if the bank is effectively in pause mode, why not announce that?

Because they don’t want to see another free-for-all in real estate prices like the one that followed their January announcement, said Pedro Antunes, chief economist at the Conference Board of Canada.

“I think they’ll be worried about that, and how they’re phrasing and managing it,” said Antunes.

“I think they’re concerned about what happened last time they paused. They were forced to increase rates again midsummer, because real estate prices were taking off again.”

The bank’s key rate is at its highest in 22 years, after 10 increases since March 2022 as the bank attempts to fight inflation.

That fight, said the bank in a news release announcing its decision, has been working.

“The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices,” the bank said in a news release.

The bank said the economy is showing clear signs of slowing down because of previous interest rate increases.

“Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year,” the bank added.

Shrinking GDP and rising unemployment were also signs of progress in the battle against inflation, the bank said.

“Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.

Rate watchers will get more insight into the bank’s thinking Thursday, when deputy governor Toni Gravelle speaks to the Windsor-Essex Chamber of Commerce.

In March 2022, the Bank of Canada began an aggressive rate-hike campaign in a bid to drive inflation down to its target of two per cent. Before the campaign, the bank’s key overnight lending rate sat at 0.25 per cent.

The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving prices down and slowing the economy.

The reverse is also true, according to standard economic theory: rate cuts make it likelier for consumers and businesses to spend money, making the economy grow more quickly.

In October, the country’s annual rate of inflation dropped to 3.1 per cent, down from 3.8 per cent in September, according to Statistics Canada.

While that’s well below the 8.1 per cent inflation peaked at in June 2022, it’s still above the bank’s two per cent target.

Canada’s economy shrank at an annualized rate of 1.1 per cent in the third quarter.