Canada’s largest bank sees no rate cuts next week, but it will still be an eventful week. RBC agrees with the consensus—they see the Bank of Canada (BoC) holding rates at the January announcement. They’ll be watching closely though, expecting the central bank to push back against any hints of rate cuts. Stronger-than-expected inflation data amplifies the potential for a repeat of the BoC’s announcement this time last year, which rolled back the fight against inflation and delayed cuts by a year.
Virtually No One Expects The Bank of Canada To Hike Rates
RBC shared its latest guidance for the highly anticipated BoC decision next week. The consensus is currently a hold, and the bank agrees that’s the most likely path. That doesn’t mean it won’t be a market moving even though—all ears will be on the Governor’s statement.
The bank expects the central bank will be extremely cautious about its victory over inflation. “The statement and press conference that follows will be watched closely for hints about how much longer the central bank expects to hold interest rates at these levels, although we expect the BoC to push back against the idea that a shift to interest rate cuts is coming soon.,” explained Nathan Janzen, assistant economist at RBC.
Last January, the BoC’s tone accidentally rolled back some of the progress they made. An overly optimistic tone convinced consumers that rate cuts were over, leading to a shopping spree. This contributed to the central bank needing to hit consumers with two additional rate hikes, despite a promised pause.
Most expect rates to come down this year, but the factors determing when are somewhat mixed.
Canada Has A Few Factors Contributing To Potential Rate Cuts Soon
Progress fighting inflation and a weakening economic backdrop are fueling the future cut narrative. The latest report showed CPI shaving off 0.1 points from annual growth. The share of CPI components showing unusually high growth is also down to less than half. That’s huge progress from peak inflation, when more than 70% demonstrated much higher than target growth.
At the same time, Canada’s economy isn’t doing so hot. The bank points to falling per-capita GDP, higher unemployment, and slowing consumer demand. Janzen also specifically calls out the decline in total hours worked, contracting for the first-time since Q2 2020. It’s not clear how Quebec’s massive labor strike that impacted nearly 500,000 workers influenced that number.
Bank of Canada Cautious, Inflation Re-Entered The Danger Zone
At the same time, the finer details don’t quite support the cut narrative right now. Progress on headline inflation was largely due to a gasoline base-effect. The BoC-preferred CPI Core excludes gasoline and food, producing a very different picture. The 3-month average for CPI Core rode the highway to the Danger Zone—the 3.5% to 4.0% range.
Headin’ into the twilight, Janzen warns “… [Core CPI is] a reminder that inflation is not yet fully back under control.”
That was the last Kenny Loggins reference, we swear. It was unclear whether Janzen was headin’ into the twilight at the time of publication. Okay, THAT was the last one.
And while less than half of CPI components are no longer showing “unusually” high growth, that’s still nearly half. Roughly double the share most households were used to pre-2020.
All of this boils down to a forecast that currently sees rate relief, but not as much as many expect.
Janzen explains, “… the BoC will be cautious about declaring victory over inflation too soon. We expect the first decrease in the overnight rate to come around the middle of this year, and for that to be followed by 75 bps more later in the year to lower the overnight rate to 4% by the end of 2024.”
If rate cuts get to that point by year-end, that would certainly provide relief. However, that puts rates just one cut below the level they were this time last year—more than double the pre-2020 level. Relief, but furthering the BoC argument that the era of low rates is over, and the start of the “higher for longer” era has begun.
