For the past two years and change, there have been few weeks, if any, without interest rate fodder in some capacity. Of course, the conversation did shift midway through last year from whether or not Canadians should brace for another rate hike, to when the first decrease to the policy rate would come — something that consumers across the board have been waiting with bated breath to have happen.
With the next rate announcement slated for Wednesday morning, the speculation is, unsurprisingly, rampant, with some experts (and some consumers alike) convinced that we will *finally* see the first cut of the cycle.
With that said, here’s what economists with Canada’s ‘Big Five’ banks have to say about tomorrow’s interest rate decision.
RBC: ‘Current level of rates no longer needed’
We capped off last week with the release of new data from Statistics Canada (StatCan) on gross domestic product (GDP), which edged up by 1.7% (annualized) in the first quarter of the year. RBC Economist Nathan Janzen commented on Friday that the rise was “smaller than expected” in an economic update published shortly after the StatCan data was released.
In that same update, Janzen said that “the downside surprise in Canada's Q1 GDP growth likely removes the last potential barrier preventing the BoC from easing off the monetary policy brakes with an interest rate cut.”
A separate report from Janzen as well as RBC’s Claire Fan, also put out on Friday, gets into a bit more detail with respect to what we can expect from the BoC on Wednesday. “All ducks appear to be in a row for the Bank of Canada to kick-start the policy easing cycle and lower the overnight rate by 25 basis points to 4.75% on Wednesday,” they wrote, pointing to not only the softening of the Canadian economy, but also, the fact that the bank’s preferred median and trim core consumer price index measures both ran below 2% in April, labour market conditions have continued to cool over spring, and housing market data has shown a persistent sluggishness as prospective buyers hold out for rate cuts.
If a cut does materialize at Wednesday’s meeting, it would closely follow cuts from the Swiss National Bank and the Riksbank — the central bank of Sweden — Janzen and Fan note.
BMO: ‘A June cut has long been our call’
In their most recent musings on inflation across major global markets, economists with BMO point out that Canada appears to be ahead of the curve on the rate cut front. In the US, for instance, “inflation remains sticky,” wrote Economist Shelly Kaushik. Meanwhile, she highlighted that inflation in the Euro Area has recently accelerated, while the UK’s inflation has come in stronger than expected.
In Canada, however, “headline CPI inflation rate eased to 2.7% in April, while all major core measures cooled below 3%,” Kaushik added. “Along with slower economic growth and a looser labour market, this report adds to evidence in favour of the Bank of Canada cutting rates this week. We expect follow-up cuts in September and December.”
Scotiabank: “It could go either way”
In a May 31 report, Scotiabank Economist Derek Holt reckons that the European Central Bank will begin cutting rates this week — for the BoC, however, he said the decision is “much more uncertain.”
“It could go either way,” Holt cautioned. “If Macklem is at all true to his word, then this week seems too soon and it should be too soon to cut.”
What Holt is referring to is messaging thus far from the central bank. For instance, at the last post-rate-announcement press conference held on April 10, Macklem did not give a concrete indication that the June meeting would culminate in a cut, only admitting that a June cut was “within the realm of possibility.” And he said so reluctantly, in response to a reporter’s question, mind you.
“What is on our mind is that the decline we've seen in momentum is very recent. Wage growth has only just started easing, inflation expectations for households are only coming down very slowly,” Macklem said in April. “We are seeing what we what we hoped and we need to see, we just need to see it for longer to be confident that we are clearly on a path to 2% inflation.”
While Holt points out that market consensus is “divided” with a “modest majority” expecting a June cut, and that there are, in fact, “broad points” in favour of a June cut — as iterated by RBC — there is a strong case for the first cut coming in July.
“By the July meeting, the BoC will be able to evaluate two more rounds of data on inflation, job growth, wages, April GDP, and several other lesser readings,” Holt wrote. “That’s a big data advantage over the June meeting and — if all goes well — would tick Macklem’s requirement for ‘months’ of further evidence. What if you cut now, only to watch everything rip into your forecast update, thereby making it difficult to deliver another cut at least for a long while?”
CIBC: ‘The case for a cut is obvious’
Over at CIBC, the long-held belief is that the Bank is poised to lower its policy rate this week, with Economist Avery Shenfeld going as far to say, “the case for a rate cut in Canada next week is obvious” in a note from Monday.
Shenfeld hit a lot of the same points as RBC and Scotiabank with respect to inflation, GDP, and the labour market. “And importantly, in contrast to the Sheryl Crow song, the first cut isn’t the deepest in terms of the economic liftoff, so there’s no danger that this small quarter-point step will trigger an irreversible inflation upsurge.”
Although CIBC is not ruling out a rate pause entirely, Shenfeld underlined that “the case for standing pat seems much weaker, particularly since the vast majority of forecasters, and market pricing, fully expects that taking a pass in June would only be about doing the same rate cut in July.”
Speaking to the argument that Macklem has stated on a numerous occasions that he needs to see more progress towards 2% inflation, and won’t go against his own word, Shenfeld said that onlookers are “splitting hairs.”
“With the market pricing in more than a two-thirds chance of a cut, it would be a larger surprise at this point if rates aren’t eased in June. Clearly, investors are looking at the big picture. Four months of very tame inflation readings, likely better than what the BoC thought would be possible, fully meet the conditions for starting to ease up on policy rates that the Bank had communicated back in April.”
TD: “The BoC will pull the trigger in July”
Economists with TD appear to be the outliers amongst the ‘Big Five’ banks, in that they’re firm in their belief that “the BoC will pull the trigger in July.”
A note from Friday Economist Marc Ercolao said that, although markets are pricing at nearly 80% in favour of a June cut — “the most conviction markets have had since the BoC’s April 10th meeting” — TD’s thinking is it’s far from a “slam dunk.”
Firstly, Governor Macklem has only acknowledged progress, but hasn’t explicitly signalled any intention to make a move,” Ercolao wrote, echoing the points made by CIBC’s Shenfeld.
“Further, in the recent summary of deliberations, some council members stressed that the risk was lower that higher rates would slow activity more than necessary. In an effort to increase transparency and forward guidance, the Bank can use next week to tee up a July rate cut, while allowing themselves to see two more inflation prints to confirm that durable 2% price growth is in sight.”
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The next Bank of Canada interest rate announcement is slated for Wednesday, June 5, 2024, at 9:45 a.m.
