Where Every Big Bank Stands On Tomorrow's Interest Rate Announcement

You blink, and another interest rate decision is not even 24 hours away, begging the question of whether the Bank of Canada will make last month’s cut the start of a trend by bringing the policy rate to a more palatable level, or leave it be at 4.75% until their next meeting in September.

In what now seems to be their typical fashion, Governing Council has given little insight into what this week's announcement will bring, only saying in their latest summary of deliberations that its “reasonable” to expect further rate cuts if inflation continues on its downtrend, but that they will take forthcoming monetary policy decisions “one meeting at a time.”

Council's reticence has not put an end to speculation, though. On the heels of data releases from Statistics Canada on inflation, the labour market, and retail sales, and the BoC’s business and consumer outlook surveys for the second quarter, there’s been a steady stream of chatter from economists with Canada’s ‘Big Five’ banks who have been busy placing their bets on what tomorrow’s rate announcement will bring. Here’s what they’ve had to say most recently.

CIBC: Quarter-point cut “won’t surprise anyone”

Economists with CIBC appear to be confident that the BoC will opt for a rate cut at tomorrow’s meeting, going as far as to call the presumed next move: “a quarter point rate cut that won’t surprise anyone.”

In a forecast from Friday, Economist Avery Shenfeld writes that the Bank isn’t likely to be too fussed over “every little blip” in Consumer Price Index, and will focus instead on “two key elements” of the “big picture,” including the deflated Canadian economy, which is evidenced by the softened labour market.

The second key element is “considerable progress has been made on inflation in the past year” and the fact that “conditions are in place for that to continue,” Shenfeld says. “While they might not single it out, mortgage interest costs now represent the lion’s share of the gap to the 2% target, and rate cuts will bring that component of the CPI down sharply.”

Shenfeld further speculates that we “might well see another cut” in September, with a pause anticipated by CIBC in December. This is a change from CIBC’s previous forecast, which called for the first pause in September and cuts in June, July, October, and December of this year.

RBC: Inflation sets BoC up “to build on first cut”

Over at RBC, economists seem to be similarly steadfast in their belief that the BoC will lower the policy rate “to build on its first cut” from June. At the centre of their argument for a cut, unsurprisingly, is inflation, which has slowed to a softer-than-anticipated 2.7%. Economists Claire Fan and Carrie Freestone write in a note from Friday “softer inflation” in June sets the BoC up for a 25-basis-point cut tomorrow.

“Similar to the June meeting, we think the central bank will highlight a weakening economic backdrop and broadly easing underlying inflation without providing additional guidance on the timing of future rate cuts,” they write.

“Risks are that there will be less easing bias, given the slightly choppier progress in recent consumer price index readings. The BoC’s preferred measures of ‘core’ inflation have been edging higher on a three-month annualized basis since April, but a streak of lower prints earlier this year means the six-month annualized readings have still been trending lower.”

Fan and Freestone additionally reference the BoC’s Q2 Business Outlook Survey, the takeaway of which is that inflation and wage growth are on track for continued moderation.

TD: Sticky core could “spook” BoC into a hold

In TD’s latest summary of economic events, TD Economist Leslie Preston also speaks to June’s inflation print, noting that it marks the slowest pace in over three years. “This reading cemented market bets for a quarter-point interest rate cut next week” she says. “We agree that is the most likely outcome.”

Even so, Preston presents a flip-side to the rate cut argument, saying that “a renewed uptick in services inflation could spook the BoC into holding rates steady.”

“The BoC’s preferred core inflation measure didn’t make any progress in June, stuck at 2.8% year-on-year on average. Narrowing in on the most recent three months, core inflation pressures picked up from 2.5% in May to 2.9% in June,” Preston writes. “If the Bank of Canada opts to surprise markets next week and take a pause on rate cuts, this will likely be the reason that they cite.”

Meanwhile, south of the border, officials with the US federal reserve have recently indicated that they are closer to cutting rates for the first time than anticipated, citing improved inflation and more balanced labor market conditions. This “helps the case for a BoC cut” as it “reduces any BoC worries about spreads widening too much and weakening the Canadian dollar, which would complicate their job reining in inflation,” Preston notes.

Scotiabank: Cut “widely expected,” “almost fully priced”

Although economists with Scotiabank have proved to be contrarians in the recent past — if you remember, they not to long ago called for the first cut of the cycle to happen in July — they’re forecasting to a familiar tune this time around. “Another quarter point cut is widely expected. It is almost fully priced,” writes Economist Derek Holt in a recent report. “If the Bank of Canada does not cut on Wednesday, then this would tighten financial conditions and serve as a confidence-sapping admission that they shouldn’t have started to ease in June.”

Holt also draws attention to the fact that “over about the past three decades, the BoC has followed up the first cut of a cycle with another cut at the next meeting five out of six times,” with the only exception being in 2015, which is “when Governor Poloz cut in January in response to a drop in oil prices, skipped, then cut again for a small total of 50 basis points.”

Although experts with CIBC appear to be cautious about forecasting too far in the future, Holt cautions that a rate pause in the fall is very much so on the table if there are setbacks to inflation between now and then. “That’s a real risk given the history of false dawns for inflation,” he adds.

BMO: Job, retail data “rate-cut supportive”

In a similar fashion to experts with CIBC and RBC, economists with BMO are calling for a 25-basis-point cut tomorrow, which would bring the policy interest rate down to 4.5%. This forecast is based on the latest inflation print. But in addition to CPI, Economist Robert Kavcic writes that the state of the Canadian job market makes a strong case for a July cut in an update from Friday.

“Canada’s job market is no longer tight, and continues to soften. The influx of labour supply is not being readily absorbed, allowing slack to build and eventually dampening wage pressure,” Kavcic says. “From a policy perspective, the lagging nature of many labour-market indicators requires us to anticipate, which means rate cuts should continue from here. And, tighter controls on immigration flows, as announced, are looking even more appropriate.

There’s also recent retail data to consider, which Kavcic speaks to in a separate publication, saying that slides in sales and volumes in May are all “rate-cut supportive.”

The next interest rate announcement is scheduled for Wednesday, July 24 at 9.45 a.m. Following that, the Bank of Canada is scheduled to meet three more times this year: on September 4, October 23, and December 11.