A rate cut is in the cards. Here’s what might hold the Bank of Canada back
Global News
The Bank of Canada is gearing up for a hotly anticipated interest rate decision on Wednesday. While data suggests a cut is in the cards, some economists have their doubts.
The economic stars appear to be aligning for the Bank of Canada to deliver an interest rate cut on Wednesday, but some economists warn the central bank might have other ideas when it comes to the right timing for the hotly anticipated first cut of the cycle.
The Bank of Canada has kept its policy rate – the benchmark rate for major Canadian loans like mortgages as well as borrowing costs for businesses and governments – on hold at 5.0 per cent since July 2023. Higher interest rates discourage spending and slow growth, which takes away some inflationary fuel out of the economy.
Governor Tiff Macklem said at the central bank’s last rate decision in April that an initial cut at the upcoming meeting in June would be “within the realm of possibilities.” That was dependent, he said, on whether inflation and other economic indicators continued to decline according to the Bank of Canada’s expectations.
Since that time, inflation has continued to ease. The April reading showed annual inflation had cooled to 2.7 per cent from 2.9 per cent in March, for instance, with the central bank’s preferred metrics of core inflation also showing signs of slowing. That comes despite persistent pressure in shelter inflation pushing up the headline number.
On Friday, Statistics Canada’s latest real gross domestic product report showed a steeper slowdown than most economists – and the Bank of Canada – were expecting.
“We’re looking at a situation where the economy has been struggling under the weight of high interest rates and inflation has become quite behaved,” says TD Bank director of economics James Orlando.
“(Monetary policymakers) absolutely have enough justification, economically, to cut interest rates. They’ve had that for quite a while.”
Following the GDP report, financial markets shifted their odds for an interest rate cut on June 5 to upwards of 80 per cent. Many economists also firmed up their expectations that cuts would begin this week, though some held to calls for an initial 25-basis-point drop in July.
