The Bank of Canada is likely to leave its overnight rate unchanged in its first decision of 2024, according to new forward guidance by the Royal Bank of Canada (RBC).
The central bank is set to make its opening rate announcement of the year next Wednesday (January 24), with little indication that it will diverge from a course that’s seen the policy rate – which leads variable interest rates in Canada – remain unchanged for three consecutive decisions.
RBC assistant chief economist Nathan Janzen and economist Claire Fan said in a Friday note that while observers would be closely watching for hints on a timeline for possible rate cuts, the central bank was likely to pour cold water on the prospect of an imminent shift to lower rates.
“There is some potential that the central bank could hint at an earlier-than-expected end to quantitative tightening policy but would likely take pains to communicate the primary objective of that change would be to ensure adequate liquidity in funding markets rather than flagging a shift to easier monetary policy and imminent rate cuts,” the economists wrote.
The Bank has hiked its benchmark rate by a total of 475 basis points since March 2022, taking an aggressive stance in the face of inflation that surged to a 39-year high of 8.1% in the summer of that year.
The consumer price index (CPI) has ticked down substantially since that June 2022 peak, although Janzen and Fan noted that stickier-than-expected recent inflation and wage growth probably indicate it’s too early for the central bank to consider easing rates at present.
“Consumer prices rose 3.2% year over year in Q4, slightly below the 3.3% increase that was last projected by the central bank in October,” they said.
“But the details in the December inflation report – including a reacceleration in the closely-watched three-month average increase in the BoC’s preferred core measures to the 3.5% to 4% range – was a reminder that inflation is not yet fully back under control.”
Inflation will still probably trend lower in the coming months, Janzen and Fan added, with mortgage interest costs currently accounting for a “disproportionate” share of overall price growth.
A softening economic landscape marked by lower consumer demand and per-capita GDP – as well as a jump in unemployment – suggest inflation will continue to trend lower.
Still, “the BoC will be cautious about declaring victory over inflation too soon,” Janzen and Fan said. “We expect the first decrease in the overnight rate to come around the middle of this year, and for that to be followed by 75 bps [basis points] more later in the year to lower the overnight rate to 4% by the end of 2024.”
Source CMP
By Fergal McAlinden