The Bank of Canada has decided to keep its benchmark interest rate at five percent, as the Canadian economy shows signs of cooling. The bank has raised the rate 10 times since early 2022 to slow down runaway inflation but has recently signaled that it may be nearing the end of that hiking cycle. Economists who monitor the central bank think it is now done with hiking, and expectations are that the bank will start to cut its rate sometime in 2024. Despite this, the bank took great pains to note that it is still willing to raise rates by even more, should the need arise.

The Details of The Bank Of Canada Maintains Its Interest Rate At 5 Percent, As Anticipated

The Bank of Canada has decided to keep its key interest rate steady at five percent, as expected. This comes after the bank raised rates 10 times since early 2022 to combat high inflation. However, recent signals from the bank suggest that it may be nearing the end of its rate-hiking cycle.

The bank’s rate affects the rates that Canadians receive on loans and savings accounts. The current rate was set in July and has remained unchanged since then, as the Canadian economy shows signs of slowing down.

The bank stated that the slowdown in the economy is reducing inflationary pressures on a wide range of goods and services. Economists believe that the bank is now finished with rate hikes and may actually begin to cut rates in 2024.

While the bank indicated that it is still willing to raise rates if necessary, some economists believe that this is just a precautionary statement to prevent markets from assuming that rate cuts are imminent.

The bank’s decision to hold rates steady was not surprising, as it marked the third consecutive time that rates remained unchanged. However, there is speculation about when the bank will start cutting rates, but the bank has given no indication of when that may happen.

Despite the bank’s statement about potential rate hikes, many economists and market watchers believe that rate cuts are more likely. They argue that the central bank will have to cut rates as the unemployment rate rises and spending in the economy declines. However, the bank wants to see further easing of underlying price pressures before making any decisions.

While financial markets predict rate cuts to start in the first quarter of next year, some commercial banks expect cuts to begin in the second half of next year. The Bank of Canada’s next rate decision will be announced on January 24th.

Ultimately, the timing of rate cuts will depend on how the economy performs in the coming months. The Canadian economy has struggled this year, weighed down by higher borrowing costs. GDP contracted in the third quarter, and the labor market has weakened.

Overall, economists anticipate a sluggish year ahead for the Canadian economy, as it adjusts to the previous rate hikes.

Wrapping Up

The Bank of Canada has decided to maintain its benchmark interest rate at five percent, as expected. The bank has been raising rates over the past year to combat inflation but has recently indicated that it may be reaching the end of its hiking cycle. The decision to keep rates unchanged was influenced by signs of a cooling Canadian economy and a reduction in inflationary pressures. Economists predict that the bank will begin cutting rates in 2024. While the bank stated its willingness to raise rates further if necessary, some believe it is an empty threat. The central bank is still cautious about the inflation outlook and remains prepared to raise rates if needed. However, there has been a shift in their messaging, with officials suggesting that the economy is approaching balance and interest rates are restrictive enough to bring inflation back to the target.

The decision to maintain the interest rate comes as the central bank observes weaker growth and a cooling job market, indicating that demand is no longer outpacing supply. While the bank has not provided hints about when rate cuts may occur, financial markets and economists expect rates to be lowered in the future due to rising unemployment and a slowdown in spending. The next rate decision and updated economic forecasts from the Bank of Canada are scheduled for January 24th. The timing of rate cuts will depend on how the economy performs in the coming months, as higher borrowing costs continue to weigh on the Canadian economy. Overall, the Bank of Canada’s decision to hold rates steady reflects ongoing concerns about inflation and a desire to restore price stability.

A survey of economists and analysts conducted by the Bank of Canada shows that many expect the bank’s first rate cut to happen by April 2024. Respondents expect a 25 basis point cut in April, with rates falling by a full percentage point in 2024. The survey also found that there is a 48% chance of a recession in the next six to 12 months, up from 40% in the previous survey. Regarding GDP growth, the survey shows that respondents project an average of 1% by the end of 2023, slightly increasing to 1.2% by the end of 2024. This aligns closely with the Bank of Canada’s official forecast of 1.2% average annual GDP growth in 2023, with a decline to .9% in 2024.

Information Of The Anticipating Initial Rate Cut

According to a recent survey conducted by the Bank of Canada, influential economists and analysts anticipate the Bank’s first rate cut to occur by April 2024. The survey, known as the Market Participants Survey, involved 28 financial market participants who were asked to provide their insights.

Based on the median survey results, the participants predict a 25 basis point cut in the Bank of Canada’s policy rate, beginning in April. This projection is a month later than what was anticipated in the Bank’s Q2 survey. Respondents further anticipate a full percentage point reduction in rates throughout 2024, which would effectively bring the overnight target rate down to 4.00%.

The survey also highlights that a median of respondents expect rates to decline by an additional half-point by Q1 2025, reaching 3.00% by Q3. It is noteworthy that three quarters of the respondents expressed their view that the risks surrounding their policy rate forecasts lean towards a higher trajectory. Nonetheless, all market participants are in agreement that the current cycle’s peak rate of 5.00% has already been reached.

In light of recent declines in bond yields, market forecasts for the central bank’s rate cuts have been adjusted, with approximately an 80% chance of a quarter-point cut by March 2024.

50/50 Chance of a Downturn

Moreover, the survey indicated a median expectation of a 48% probability of a recession occurring within the next six to 12 months. This figure represents an increase from the previous survey’s estimation of 40%. However, looking ahead to the next six months specifically, respondents perceive a slightly reduced chance of the economy falling into recession, currently at 40%.

Furthermore, the respondents’ projections suggest that GDP growth will average at 1% by the end of 2023, with a slight increase to 1.2% by the end of 2024. These figures are in line with the Bank of Canada’s official forecast, which anticipates an average annual GDP growth of 1.2% in 2023, subsequently decreasing to .9% in 2024.

Wrapping Up

According to a survey conducted by the Bank of Canada, influential economists and analysts predict that the central bank will make its first rate cut by April 2024. The survey, which involved 28 financial market participants, revealed that respondents expect a 25 basis point cut in the policy rate starting in April, a month later than the previous survey. The participants anticipate a full percentage point cut in 2024, bringing the overnight target rate down to 4.00%.

By the first quarter of 2025, respondents expect rates to fall another half-point and reach 3.00% by the third quarter. Despite the expectations of rate cuts, three quarters of respondents believe that the risks surrounding their forecasts are skewed towards a higher path. However, all market participants agreed that the current cycle’s peak rate of 5.00% has already been reached. Following a recent decline in bond yields, market forecasts for the central bank’s rate cuts have been adjusted, with an approximately 80% probability of a quarter-point cut by March 2024.

The survey also revealed that experts estimate a 48% chance of a recession occurring in the next six to twelve months, up from 40% in the previous survey. Over the next six months, respondents see a 40% likelihood of the economy entering a recession, down from 50%. The survey further indicates that GDP growth is expected to average 1% by the end of 2023, slightly increasing to 1.2% by the end of 2024. These figures align closely with the Bank of Canada’s official forecast of 1.2% average annual GDP growth in 2023, declining to .9% in 2024.

The Bank of Canada has decided to keep interest rates unchanged for the second time in a row, but expressed ongoing concerns about inflation risks and price pressures. The overnight target rate remains at 5.00%, and the Bank acknowledged that monetary policy is effectively curbing spending and alleviating price pressures, but it still wishes to see faster progress.

The Bank’s worries about slow progress towards price stability and increased inflation risks were also expressed, stating that it is prepared to raise the policy rate further if necessary. GDP growth forecasts were revised, and inflation forecasts were adjusted upward by the Bank. Despite today’s rate hold, more households will face higher interest rates and monthly payments as their mortgages come up for renewal.

The Details of The Rate Hold From Bank of Canada

The Bank of Canada made its anticipated decision to keep interest rates unchanged for the second time in a row today. However, the Bank expressed its ongoing concerns about inflation risks and price pressures.

As expected, the overnight target rate remained at 5.00%, meaning variable-rate mortgage borrowers will continue to face a prime rate of 7.20%.

In its statement, the Bank acknowledged that monetary policy is effectively curbing spending and alleviating price pressures, but it still wishes to see faster progress.

The statement continued to express the Bank’s worries about slow progress towards price stability and increased inflation risks, stating that it is prepared to raise the policy rate further if necessary.

Although improvements have been observed in inflation and underlying demand, economists believe it is too early for the Bank to relax its vigilant stance.

BMO’s Douglas Porter commented that price and wage growth are still too high for the Bank of Canada to veer from its hawkish rhetoric. Porter expects the Bank to maintain its current position until deep into 2024, especially without a significant rebound in growth, a surge in inflation, or a considerably weaker Canadian dollar.

TD Economics’ James Orlando agrees that the Bank of Canada is likely to keep its hawkish bias to achieve the projected economic slowdown. He noted that the Bank’s rhetoric has influenced a longer duration for its policy rate.

Consequently, the Government of Canada 10-year bond yield has reached its highest level since 2007.

GDP growth forecasts were also revised by the Bank of Canada in today’s decision, as the previous rate hikes’ effects begin to take hold. The Bank now estimates an average economic growth of around 1% for this year and next before gaining momentum again in 2025.

Inflation forecasts, on the other hand, have been adjusted upward by the Bank. Mortgage interest costs and high inflation in rent and housing expenses, along with slower normalization of near-term inflation expectations and corporate pricing behavior, have contributed to the upward revision. Core inflation measures show minimal downward movement.

Regarding household finances, despite today’s rate hold, more households will face higher interest rates and monthly payments as their mortgages come up for renewal. This is expected to impact activity and mitigate price pressures, possibly leading to rate cuts in mid-2024.

The Bank also acknowledged the impact of higher rates on overall household financial health. Measures of household financial stress have risen from pandemic lows as interest rates have increased. Non-mortgage holders are particularly affected by indicators of financial stress, and delinquency rates for various credit products, including auto loans, have increased.

The next rate decision from BoC will be held on December 6, 2023.

Wrapping Up

The Bank of Canada has decided to keep interest rates unchanged for the second consecutive time. However, the Bank remains concerned about inflation risks and price pressures. The overnight target rate will remain at 5.00%, resulting in a prime rate of 7.20% for variable-rate mortgage borrowers. The Bank believes that monetary policy is effectively curbing spending and alleviating price pressures but would like to see faster progress. It continues to worry about slow progress towards price stability and increased inflation risks and is prepared to raise the policy rate further if necessary.

Economists do not expect the Bank to relax its vigilant stance, as price and wage growth are still too high. The Bank’s hawkish rhetoric has influenced a longer duration for its policy rate, leading to the highest level of the Government of Canada 10-year bond yield since 2007.

The Bank has revised its GDP growth forecasts and now estimates an average economic growth of around 1% for this year and next. Inflation forecasts have been adjusted upward due to various factors, including mortgage interest costs, high inflation in rent and housing expenses, and slower normalization of near-term inflation expectations and corporate pricing behavior.

Despite the rate hold, more households will face higher interest rates and monthly payments as their mortgages come up for renewal, impacting activity and possibly leading to rate cuts in mid-2024. The Bank has also acknowledged the impact of higher rates on household financial health, with measures of household financial stress rising and delinquency rates increasing for various credit products. The Bank’s next rate decision is scheduled for December 6, 2023.