The Bank of Canada is set to make its interest rate decision next week, and the uncertainty surrounding the outcome is keeping economists and markets on edge. While most economists are predicting a rate cut, Capital Economics has changed its forecast and now believes the central bank will hold off until July.
The recent resilience of GDP and employment growth has led Capital Economics to believe that the Bank of Canada will err on the side of caution and wait until July to make a move. This change in forecast is significant, as Capital Economics had previously predicted a rate cut as early as March.
Recent data showing a slowdown in headline inflation and a stronger economy and job market have influenced Capital Economics’ decision to change its forecast. The bank now expects GDP to be close to 2% annualized for the first quarter and sees a chance that the consumer price index could hit 2% earlier than expected.
The Bank of Canada’s summary of deliberations reveals a divided governing council, with some members ready to cut rates and others emphasizing the strong performance of the economy. This suggests that the bank may lean towards holding off until the July meeting to ensure inflation is on track.
Despite the uncertainty, Canadians themselves are skeptical about the timing of interest rate relief. A recent survey found that 41% of Canadians do not expect a rate cut in June, while 31% do.
Capital Economics believes that once the central bank starts cutting rates, it will do so more quickly than the market is predicting. The bank expects a series of 25 basis point cuts at each meeting from July until the rate reaches 2.5%.
However, there are risks to this forecast, including the potential for looser policy to reignite a hot housing market and the impact of a slower U.S. Federal Reserve. Capital Economics expects the Fed to cut rates more slowly than the Bank of Canada, which could widen the policy rate differential and weaken the Canadian dollar.
In conclusion, while the Bank of Canada may struggle to reach a consensus on interest rates, Capital Economics believes it is more likely that the holdouts will win the debate to wait for more certainty before making a move.