Interest rate cuts are coming, but the Bank of Canada won't say when
After missteps around forward guidance, central bank wary of being pinned down
Weary Canadian households, clobbered by nearly two years of rising prices and skyrocketing interest rates, will have to wait a little longer for relief on their borrowing costs.
The Bank of Canada left its key overnight lending rate unchanged at five per cent on Wednesday, citing the persistence in underlying inflation and concerns that it might declare victory too soon and be forced to backtrack.
But the bank says it has shifted from whether rates are high enough to how long rates need to remain elevated.
"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 five per cent," central bank governor Tiff Macklem said at a news conference in Ottawa.
The obvious question, then, is when rates might begin to fall. On that, the Bank of Canada won't say.
"It is important that we don't give Canadians a false sense of precision," Macklem told reporters.
Rates could start falling by summer: economists
If you read through the bank's projection, you can probably put the pieces together yourself. The bank expects inflation to decelerate to 2.5 per cent by the end of the year. It believes the economic growth will remain near zero per cent but won't dip into a recession.
So most economists expect the central bank will start lowering interest rates by the summer.
"We see no reason to alter our call for the first [quarter-point] cut to come in June, and for the bank to surpass market expectations by delivering a total of 150 basis points in cuts by the end of this year," Avery Shenfeld, chief economist at CIBC Capital Markets, wrote in a note to clients.
"BMO's call for a June start to rate cuts looks perfectly reasonable at the moment," wrote Benjamin Reitzes, a managing director at BMO Capital Markets.
Nathan Janzen, assistant chief economist at the Royal Bank of Canada, wrote to clients: "We expect slower price growth alongside a weakening economic backdrop will push the [Bank of Canada] to start gradually lowering the policy rate by mid-year."
Trading in investments known as swaps — a type of investment where traders can essentially bet on where they think rates will be — implies there's about a 97 per cent chance of a rate cut by the Bank of Canada's policy meeting on July 24.
So what's keeping the central bank from offering similar guidance?
"Well, [Macklem] has some bad experience with forward guidance," Jim Stanford, economist and director of the Centre for Future Work, said.
Inflation brought higher interest rates
Back in the early days of the COVID-19 pandemic, Macklem lowered interest rates and told Canadians they would remain low for a long time.
"If you've got a mortgage or if you're considering making a major purchase, or you're a business and you're considering making an investment, you can be confident rates will be low for a long time," Macklem said in July 2020.
Within a matter of months, inflation began to surge. Even then, many dismissed rising prices as "transitory."
By the summer of 2021, consumer price index (CPI) inflation had pushed through the Bank of Canada's target window of one to three per cent.
In an op-ed published in the Financial Post, Macklem said prices were rising because of the unique circumstances of the pandemic.
"All these factors have driven prices up, but none of them are likely to last. So, we shouldn't overreact to these temporary price increases," he wrote.
Prices, of course, kept on climbing. By June 2022, the CPI peaked at 8.1 per cent, and the Bank of Canada began one of the most aggressive interest rate hiking cycles in its history.
Higher rates squeezed indebted households and businesses. Variable rate mortgage holders bore the brunt in the early stages, but another 2.2 million mortgage holders are bracing for renewal at higher rates sometime in the next two years.
Those households are waiting, some desperately, for a sense of when they can expect a break.
Central bank faces 'a tricky balance'
Macklem said providing specific metrics or an exact date wouldn't be helpful.
"I worry that putting it on a calendar is a false sense of precision. We're going to have to see how inflation evolves," he said on Wednesday.
The messaging missteps aren't the only thing weighing on policy-makers.
"It's a tricky balance," said Jeremy Kronick, associate vice-president at the C.D. Howe Institute. "We haven't seen a tightening cycle like this ever."
There are real risks to telling Canadians the coast is clear before it's abundantly obvious that inflation really has come under control, said Kronick, who is also director of the Centre on Financial and Monetary Policy at the institute.
Karl Schamotta, chief market strategist at the Toronto financial services firm Corpay, said Macklem "may not want to keep applying the brakes, but he also sees the danger in stepping on the gas pedal."
But Schamotta said there's a bigger issue at play here.
"Beyond that, one would hope that central bankers have absorbed a sense of humility over the last few years," he said in an email. "Committing to a future path of action simply doesn't make sense when it's clear that we don't have a good handle on what's driving the Canadian and global economies."
And there's no question that the world is awash in uncertainty. Wars are raging in Europe and the Middle East, shipping lanes are under attack and climate-related disasters are wreaking havoc on global production.
So, the forecasts can make bold claims about what may come next, but for now at least, the Bank of Canada will only say the trends are encouraging and that progress is being made. It won't, however, pin down a date for interest rate policy changes until it's convinced the job is done.
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