The Bank of Canada has left its key rate at 5% – when can we expect the first cut?

The Bank of Canada kept rates unchanged for the fourth straight meeting and for the first time said it would not have to raise rates again if the economy progresses as it forecasts.

Central bank policymakers led by Tiff Macklem left the benchmark overnight rate unchanged at five percent on Wednesday, a pause that markets and economists in a Bloomberg survey had expected. The bank says it believes economic growth has stalled and will remain slow in the near future, which will help bring inflation back to the bank’s target of two percent next year.

“There was a clear consensus to keep our policy rate at five per cent,” Macklem said in his prepared opening remarks at a news conference. “In discussions within the Bank’s governing board, the direction of future policy is shifting from whether monetary policy is sufficiently restrictive to how long to maintain the current restrictive stance.”

The “dovish” statements suggest the bank sees the economy slowing quickly and believes past rate hikes – 475 basis points (4.75%) over less than two previous years – are enough to fight inflation. This could potentially opens the door to rate cuts in the nearest months.

“If the overall economy progresses in line with the forecast we released today, I expect future discussions will focus on how long we will keep the policy rate at five percent,” Macklem said.

The bank wants to see a “further and sustained weakening” in core inflation and will continue to focus on the balance of supply and demand in the economy, inflation expectations, wage growth and corporate pricing activity, the bank said in a statement.

His forecasts suggest the economy is now in “modest oversupply” and he cut his forecast for economic growth to 0.8 percent this year from 0.9 percent. However, the Bank of Canada’s base case still assumes a soft landing, with economic growth picking up around the middle of the year.

The bank expects inflation to remain close to three percent in the first half of 2024 before falling to around 2.5 percent by the end of the year and returning to the bank’s target of two percent next year.

The consumer price index accelerated to 3.4% year-on-year in December and has remained above the 3% limit of the central bank’s target operating range for 32 of the last 33 months. The Bank of Canada’s closely watched fundamentals also rose.

“Over the forecast horizon, continued oversupply in the economy continues to weigh on prices, with corporate price behavior and inflation expectations gradually returning to normal,” the bank said in its monetary policy report.

Wage growth, still rising 4% to 5% a year, is expected to slow toward inflation and moderate productivity growth, the bank said.

However, house price inflation will remain “elevated for some time”, with mortgage interest rate growth gradually slowing as financial conditions ease and the impact of additional households renewing and taking out new mortgages is reduced.

Rental price inflation, supported by strong housing demand and tight supply, is forecast to decline due to slowing population growth and an expected increase in new housing starts.

Stronger-than-expected growth in house prices is one of the main risks that could push inflation above expected levels, the bank said.

Canada’s economy is more sensitive to interest rates than its competitors due to its higher debt load and shorter mortgages. Most economists believe the Bank of Canada will cut rates by June, and overnight swap traders are making similar bets.

Dawn Desjardins, chief economist at Deloitte Canada, said the decision to keep rates as they are shows the bank remains “cautious” and “patient” in its goal of containing inflation.

“They remain cautious, they continue to say that (inflation) should develop the way we think it should, and that is very fair,” Desjardins told Bloomberg.

Desjardins is targeting spring as the time when Canadians could see the Bank of Canada’s first rate cut.

“The first reduction will most likely occur in the second quarter. Now, April or June is of course a big question mark, and it will really depend on what we see in the new inflation reports,” she said.

Ed Devlin, founder of Devlin Capital and senior fellow at C.D. The Howe Institute said it expects the first rate cuts to occur in June, with four 25 basis point cuts expected in 2024 (a total of 1%).

“The markets are forecasting 1% and I don’t have a big problem with that, we’ll see how the data develops,” Devlin said.

It is important to recall here that the Prime rate of commercial banks today is at 7.20% and if the Bank of Canada reduces its key rate by 1%, then the Prime rate will most likely drop to 6.20% by the end of 2024. This means significant relief for owners of adjustable rate mortgages and home equity lines of credit (HELOCs).

Those thinking about taking out a new mortgage today and leaning toward an adjustable rate mortgage will likely find rates comparable to today’s fixed products by the end of the year and will increasingly benefit over the next 4 years as the Bank of Canada continues to cut rates.

The Bank of Canada’s next meeting will take place on March 6.