Do economists expect a rate cut from the central bank?

On Wednesday, the central bank will make its first policy decision in 2021, and everyone wonders whether the Governor Tiff Macklem will keep the key lending rate unchanged at today’s 0.25% or cut it to help Canada cope with the severe lockdown measures.

As cases are still growing during the second COVID-19 wave, here are the forecasts from some economists and analysts concerning the Bank of Canada rate decision:

Brett House, vice-president and deputy chief economist at Scotiabank:

“In our opinion, the BoC will not cut its benchmark rate this time, as rate-depending segments don’t need extra stimulus. For example, Governor Macklem said before the holidays that we should look at how real estate sector is changing: home sales rose by 7.2% from November to December, marking a record high increase and leading to an annual rise of 12.6%. In other areas, retail sales have been exceeding the previous year’s levels for several months already”.

“While certain immediate risks to the economy have gone up because of new restrictions, medium-term risks for determining monetary policy have eased. Vaccines are being delivered almost a year earlier than the BoC has expected; the U.S. stimulus and funding bill passed and a government shutdown was avoided, which will lead to positive consequences for Canada; and financial conditions are still quite favourable for growth.”.

David Rosenberg, chief economist and strategist at Rosenberg Research & Associates:

“No one knows for sure what to expect from the central bank. It has used almost all of its tools. Maybe, a small rate decline to cut the loonie slightly, but that won’t do much. We believe the forward announcement will be dovish given the current circumstances.”

Royce Mendes, senior economist at CIBC Capital Markets:

“It’s a difficult decision for central bankers. In case they see that a rate cut will not harm the financial system too much, they may use it immediately. However, the Bank can’t solve the recent round of economic pain, as it’s been caused by infection rates, not the interest rates. In fact, public health officials want people to stay at home. Officials also might not want to add any more fuel to the fire of growing home prices. That’s why the Bank is more likely to only hint at a possibility of a rate cut without actually reducing it. It could be a warning for foreign exchange markets that keep raising the value of the Canadian dollar, harming the recovery in exports.”

“Obviously, the central bankers may find that cutting the key lending rate will cause too much harm to the financial system and all this discussion about a micro rate cut will not materialize.”

Dawn Desjardins, vice-president and deputy chief economist at RBC Economics:

“We believe the central bank will keep its policy stance unchanged and, while pointing to the downside risks to the near-term outlook, for them to include a stronger rebound in activity in the second half of the year into its forecast in case of positive vaccine developments.”

Craig Alexander, chief economist and executive advisor at Deloitte Canada:

“As we can see a strong second wave of infection, the Bank of Canada may expect an economic contraction in the first quarter of this year. The question is whether it will lead to an increase in monetary stimulus. The BoC may expand its bond-buying program. The benchmark overnight rate is already at what the Bank considers to be the lower mark, so it limits the room for more changes However, it could be a 0.10% cut”.

“I expect the Bank to admit the near-term downside risks, but note the vaccine rollout and the eventual reduction in health risks – and keep monetary policy unchanged.”