Bank of Canada Governor Tiff Macklem, in Ottawa, on Feb. 16.Adrian Wyld/The Canadian Press
The Bank of Canada will keep its key interest rate steady at 4.50 per cent through 2023, according to most economists polled by Reuters, with an even smaller minority now expecting an interest-rate cut by year-end than a poll taken a month ago.
Markets still expect more than 50 basis points of cuts, pricing fuelled by fears last month over stresses in the U.S. and European banking sector, despite Canada’s economy and labour market performing better than expected.
In a speech last week, BoC Deputy Governor Toni Gravelle said the Canadian banking system had a well-earned international reputation for stability, suggesting policy makers are more focused on inflation and how the economy is performing.
In March, the BoC was the first major central bank to stop its aggressive hiking cycle and is on what it calls a conditional pause. So all 33 economists polled March 31-April 6 said it will hold its overnight rate at 4.50 per cent on April 12.
A majority of forecasters, 23 of 31, said the rate would remain unchanged for the rest of 2023. Only seven expected at least one 25-basis-point rate cut by end-year, down from 13 in a survey taken about a month ago.
Derek Holt, head of capital markets economics at Scotiabank, said the fundamentals of the Canadian economy do not support current market pricing for rate cuts later this year.
“In my view, central banks are likely to set a higher bar against easing than market participants … The plague that has driven thinking [is] that they can’t possibly hike because, gosh, that might damage growth, when that’s the point.”
At 5.2 per cent, inflation is still running well over twice the Bank’s 2 per cent target and is unlikely to reach the goal until at least 2025, the poll suggested, a view also shared in the latest BoC business outlook survey.
The economy, which expanded at a better-than-expected pace in January, was forecast to have grown 1.7 per cent last quarter, significantly higher than the 0.3 per cent contraction predicted just three months ago and the BoC’s own expectation of 0.5 per cent growth.
Quarterly growth forecasts were largely downgraded from a January survey. The economy was predicted to grow 0.7 per cent and 1.4 per cent this year and next, compared with 0.5 per cent and 1.5 per cent, respectively.
While a recent expansionary federal budget and the latest surge in oil prices are good news for the oil-exporting economy, it could make the BoC’s job tougher as both risk pressuring inflation higher than the central bank wants.
Indeed, 10 of 13 economists who replied to an additional question said the bigger risk was inflation in 2023 would be higher than they expect.
Asked what was more likely from the Bank this year, 18 economists in response to a separate question were evenly split on whether it would be to hike again or cut rates.
“If momentum continues to remain strong, that could be something that pushes the BoC toward tightening again later this year,” Robert Both, macro strategist at TD Securities, said.
“The current level of inflation and signs of a rebound in Q1 GDP growth are something that are going to make it very difficult for the BoC to cut in the near term.”
The Canadian dollar is forecast to rise over the coming year on expectations the export-driven economy avoids a hard landing and its U.S. counterpart weakens as the rate gap with its peers stops widening, a separate Reuters survey showed.