Rate expected to hold, cuts could be coming

There’s not much doubt that the Bank of Canada will hold its interest rate tomorrow, but there is a lot of debate over how policy makers will sound.

It’s this tone, hawkish or dovish, that economists will be watching for hints on how long Canadians must wait for rate relief.

Those in the dovish camp expect to see a change in the central bank’s forward guidance that points to the possibility of a rate cut in the near future.

The wording, according to National Bank of Canada economists Taylor Schleich and Warren Lovely, could go something like this: “If Governing Council sees further and sustained easing in core inflation, it may soon become appropriate to start dialing back the degree of monetary policy restraint.”

Bofa Global Research also expects a shift to the dovish side and said it could come in the central bank’s statement or the press conference after.

“We believe the table is set for the BOC to start a cutting cycle,” said the economists led by Carlos Capistran.

Headline inflation came in lower than expected in January and February, falling within the bank’s target range and core inflation eased to 3.2 per cent.

The labour market has also helped build the case. The March report showed the economy lost jobs and the unemployment rate rose to 6.1 per cent, its highest level since the pandemic ended.

But there are a few flies in the ointment.

Services inflation is sticky, suggesting the bank will want to wait a bit longer to see a sustained downward trend in core inflation, says Bofa. The resilience of wage growth also remains a concern.

Then there’s the economy, which exceeded expectations in January. Oil prices, which have increased 16 per cent year to date, could further fuel this growth — and inflation, they said.

Another possible reason for the central bank to hold off is “fear of stoking a smoldering housing fire,” said Bank of Montreal chief economist Douglas Porter.

Home sales and prices appeared to stabilize in March’s early data and reports suggest there is a lot of pent-up demand.

The Bank of Canada also likely wants to see the federal budget, which will be tabled April 16, to see how fiscal policy might help or hinder its fight against inflation.

For many observers this all adds up to hold in April and a cut in June or July.