What the experts expect from the Bank of Canada rate decision today

Central bank expected to hold but all eyes will be on the statement

The Bank of Canada’s next interest rate decision is pretty much baked in as a “hold” as far as economists and markets are concerned although one expert warns that the governor Tiff Macklem should not treat “this week’s communications as a mere placeholder.”

Most economists, in pre-meeting notes, said they will be scanning the central bank’s statement on the Dec. 6 decision for signs that its view of the economy and inflation is shifting.

In a speech on Nov. 22, Macklem said that “higher interest rates have cooled the overheated economy and taken the steam out of inflation,” adding that he believes the central bank may have done enough to tame the consumer price index.

He did reiterate that the central bank is prepared to raise rates again if inflation persists.

Canada reported GDP last week that showed growth contracted 1.4 per cent in the third quarter on an annualized basis, “adding to evidence that the economy is softening,” Royal Bank of Canada economists Nathan Janzen and Claire Fan said in a note.

Inflation fell to 3.1 per cent last month from a high of 8.1 per cent in June 2022.

Still, Derek Holt with Scotiabank Economics cautioned in a note on Dec. 5 that investors are already betting there is a “significant probability” the bank will cut at its Jan. 24 meeting.

“A mere indifferent shrug of the shoulders this week could leave the BoC vulnerable to runaway cut pricing over the ensuing seven long weeks,” Holt said, suggesting the bank will adopt hawkish messaging to ward off such a reaction.

Here’s what economists say about the looming Bank of Canada rate decision.

Carlos Capistran, Bank of America

“We expect the Bank of Canada (BoC) to remain on hold with the overnight rate at five per cent. The economy remains weak as shown by the GDP contraction in 3Q (-1.2 per quarter-over-quarter seasonally adjusted annual rate) and the output gap is closing. Inflation keeps falling and core inflation is now showing an incipient downward trend. But we expect the BoC to remain concerned about inflation as the level of core is still high (3.6 per cent year over year) and wage growth is still quite high (five per cent year over year). The risk is that instead of a ‘hawkish hold’ the BoC changes its language, and we get a ‘dovish hold,’ although we think it is too early for that. We expect the BoC to start its cutting cycle in June 2024, with risks for an earlier start. On strategy, assuming inflation moves lower, which is the key to initiation of cutting cycles in 2024, slower Canadian growth should allow faster cuts vs. the U.S.”

Stéfane Marion and Alexandra Ducharme, National Bank of Canada

“Our fixed income strategists expect the Bank of Canada to leave its key interest rate unchanged this week. At this stage, we don’t expect an overt easing bias, given that the core inflation measures most often used by our central bank are all relatively sticky at three per cent. Having said that, it is important to note that these CPI (consumer price index) measures are prone to substitution bias, which can mask the extent to which consumers are adjusting to inflation. One way around this problem is to use the core personal consumption deflator, the (United States Federal Reserve’s) preferred measure of underlying inflation, which is published quarterly in our country. This measure shows that core inflation in Canada is decelerating very rapidly and was slightly below that of the U.S. in the third quarter at 2.1 per cent annualized. While the timing of a potential rate cut remains uncertain, current inflation trends in Canada suggest that some tangible relief for consumers is on the horizon in 2024.”

Nathan Janzen and Claire Fan, Royal Bank of Canada

“The BoC is widely expected to hold the overnight rate steady at five per cent for the third meeting in a row. But the statement will be watched closely for signs that a slowing economy and easing inflation pressures are shifting future interest rate cuts into focus…. With evidence building that the economy is softening, the focus has shifted from whether additional interest rate hikes will be needed to how long before the first cuts. While we’re expecting a dovish lean from the BoC relative to past interest rate decisions, and governor Macklem himself has said that past rate hikes may have been enough to slow inflation to target, we don’t see the BoC rushing to cutting rates. Lower inflation prints over the late fall were welcome but followed a string of ‘sticky’ core inflation readings. We expect the BoC will stay on hold through the first half of 2024 before moving to rate cuts in Q3 next year.”

Derek Holt, Scotiabank

“If they’re wise, they won’t treat this week’s communications as a mere placeholder.

“Mortgage rate cuts are back in vogue now and thanks to the fact that a key driver of fixed term mortgage rate pricing—the five-year GoC yield—is down by almost a percentage point from the peak and back to levels unseen since early last June. This is exactly the scenario I was most worried about in terms of containing pressures on housing affordability and holding inflation risks at bay should the BoC waffle.

“The BoC needs to be very careful to avoid doing anything this week that would drive 5s richer yet. We could wind up plumbing the sub-three per cent depths into the winter mortgage pre-approvals and spring housing markets and unleash greater inflationary pressures through another powerful housing boom with spillover effects on related consumption.”

• Email: gmvsuhanic@postmedia.com

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