Bank of Canada Done With Rate Hikes, But When Is First Interest Rate Cut Coming?

The Bank of Canada held its key lending interest rate at 5% for the fourth consecutive meeting. Of particular note, the central bank said, for the first time, that it won’t raise interest rates again if the economy moves in line with forecasts.

“If the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at 5%,” said Bank of Canada Governor, Tiff Macklem at a news conference.

This pivot has put potential rate hikes on the back burner with attention now focused on when the first interest rate cut is coming. The Bank of Canada isn’t as forthright with that prediction.

Canada’s inflation rate is 3.4%, nudging down closer to its 2% target. It’s hovering around 2% though, if you take mortgage interest and rents out of the equation. They are, the bank admits, playing an oversized role in inflation.

Higher interest rates are helping drive rental prices higher and leading to higher debt for homeowners. And keeping interest rates higher for longer could prove disastrous for homeowners and renters.

Is Canada in a Recession?

The Bank of Canada still believes the Canadian economy can avoid slipping into a recession and is looking for 2024 gross domestic product (GDP) growth of 0.8%. But the central bank might be a little optimistic in overestimating the country’s economic strength.

It predicted the Canadian economy would expand 0.2% in the third quarter; it contracted 0.3%. It expects GDP to be flat in the fourth quarter of 2023 and the first quarter of 2024.

Oxford Economics, a U.K.-based macro forecasting and research firm, believes the Canadian economy is already in a recession. They predicted that third-quarter 2023 GDP would slip 0.3%, and they were correct. The firm diverges sharply with the Bank of Canada and believes the Canadian economy will register a 0.3% contraction in the fourth quarter of 2023 and slip 0.4% in the first quarter of 2024.

The Bank of Canada, meanwhile, expects GDP to expand 0.5% in the second quarter of 2024 while Oxford Economics sees it contracting 0.1% and not showing signs of marginal growth (+0.1%) until the third quarter of 2024, which is when the Bank of Canada expects GDP growth of 0.5%.

This has led many on Bay Street to predict the Bank of Canada will need to lower interest rates sooner and faster than initially thought. Analysts thought the Bank of Canada would introduce its first interest rate cut in March but have now pushed the date back to April or June, with as much as 150 basis point (1.5%) cuts expected in 2024. This would bring the country’s interest rate down to 3.5%.

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The Bank of Canada did what Bay Street expected, and that was to hold its key lending rate at 5%. What wasn’t entirely expected was for the central bank to hint that lower interest rates were coming later this year.

Fears that Canada is already in a recession could force the Bank of Canada to introduce interest rate cuts sooner than expected. What kind of impact will falling interest rates have during a recession? Ask the trading experts at Learn-To-Trade.com, Canada’s oldest and leading provider of stock market trading courses.

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