BoC turns attention to rate cuts

The Bank of Canada’s path to its 2% inflation target seems to be getting a little clearer.

What happened: The BoC held the key interest rate at 5% again yesterday. According to Governor Tiff Macklem, the narrative is shifting from if the BoC will lower borrowing costs to when, with some economists predicting rate cuts by late spring. 

  • Macklem didn’t entirely rule out more rate hikes, but said that the current rate is enough to restore pricing stability by further tamping down demand in the economy.

  • But, a key line in the three last decisions noting that the BoC is “prepared to raise the policy rate further if needed” was notably missing from yesterday’s announcement. 

Why it matters: While most analysts aren’t expecting rate cuts until April or June, the BoC’s change of tone signals confidence that interest rates are working to cool inflation — which had fallen from its 2022 peak to 3.4% in December, and is expected to near 2% sometime in 2025.  

Yes, but: The rising cost of shelter is still a problem, with mortgage interest costs remaining high and rents continuing to rise across the country. According to the BoC, ongoing supply and demand imbalances mean that it’s going to take some time for those prices to stabilize.

  • The hold is particularly tough on Canadians who have mortgages with variable interest rates, who, on average, saw their monthly payments rise by almost 50% last year.

Bottom line: In a recent note, BMO economist Benjamin Reitzes wrote that while rate hikes seem to have done their job, the BoC will likely keep its policy rate at 5% until it sees more evidence that consumers' and businesses' belt-tightening is driving down prices.—LA