The Bank of Canada is widely expected to leave its target for the overnight rate at 5% when it meets next week. The authorities continue to talk about their willingness to “raise the interest rate further if necessary,” and indeed inflation continues to rise more than the BoC would like, but we see little prospect of further policy tightening. politics from here. Instead, the next step is expected to be an interest rate cut, most likely at the April meeting.
The BoC’s latest Business Outlook Survey reported weakening demand and “less favorable business conditions” in the fourth quarter, with high interest rates having “negatively impacted most businesses”, leading to that “most companies” do not plan to “add new staff.” Job growth appears to be cooling and the Canadian economy contracted in the third quarter and is expected to post less than 1% growth for the fourth quarter. Also remember that Canadian mortgage rates will continue to rise for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. This will intensify financial pressure on households, curbing both consumer spending and inflationary pressures. Unemployment is also expected to rise given the slowdown in job creation and high rates of immigration and population growth.
Against this backdrop, we expect Canadian headline inflation to slow to 2.7% in the first quarter and drop to 2% in the second, versus the consensus forecast of 2.6%. As such, we see room for the BoC to cut rates by 25 basis points at each meeting starting in April: 150 basis points of rate cuts versus the consensus and market price prediction of 100 basis points of easing. of policies.