Will the Bank of Canada decide to start cutting rates this Wednesday?

In January 2022, all conditions were ripe for the start of raising interest rates.

The annual inflation rate reached 4.8 percent in the previous month, more than twice the Bank of Canada’s target. Downplaying the risk of inflation from 2021, central bankers were very nervous. It was high time to start tightening monetary policy.

However, when the rate decision was made on January 26, 2022, the Bank of Canada did nothing. Instead of raising interest rates from zero, where they have been since the early months of the pandemic, Gov. Tiff Macklem used the rate decision to tie up loose ends and make it clear that rate increases will occur at the next meeting in five weeks.”

This story could prove instructive as the Bank of Canada approaches a new turning point.

This Wednesday, June 5, is Mr. Macklem and his team’s first real opportunity since the start of rate hikes in 2022 to begin easing monetary policy.

Inflation is back within the bank’s target range and has been there for four months, while high interest rates continue to weigh on households and businesses. The latest GDP data released on Friday was weaker than expected and showed the economy slowing in the first quarter.

Overall, the latest data suggests it is time for the central bank to reverse course and start cutting rates before it pushes the economy into an unnecessary recession and below its 2 percent inflation target.

But there are also arguments for doing nothing until July, which could reassure a wary group of central bankers scarred by the experience of losing control of inflation, which reached 8.1 percent in mid-2022.

The Canadian real estate market is spring-loaded and home prices could soar as interest rates begin to fall. It’s something Mr. Macklem and the bank’s five deputy governors may want to put off until after the spring home-buying season.

Likewise, the Bank of Canada can’t stay too far ahead of the US Federal Reserve, which isn’t expected to start cutting interest rates until September without putting pressure on the Canadian dollar.

“There is no right answer to the question of when to reduce. Central bankers make judgments based on a range of data, and unless you’re in the room, you don’t know specifically what will tip the balance in one direction or another,” Frances Donald, chief economist at Manulife Financial, said in an interview with Bloomberg.

“In normal times, the Bank of Canada would probably have every right to start cutting rates now and make some pretty significant cuts. But what will haunt them is that the mistake of cutting too soon or too quickly will be extremely costly for the Canadian public, which has already suffered a significant inflation shock,” she said.