Yahoo Finance Bank of Canada expected to 'cautiously' start cutting rates in spring: Deloitte Canada
Deloitte Canada expects the Bank of Canada to start cutting rates in the spring, albeit at a more cautious pace than markets currently expect, even as pressure from higher rates weighs on the economy through 2024.
In its 2024 economic outlook, Deloitte Canada forecasts that the central bank will start cutting rates in the second quarter, with the overnight target rate dropping to 4.25 per cent by the end of the year. The benchmark rate is currently at 5 per cent.
"While our baseline forecast shows that policymakers will be in a position to ease rates beginning this spring, it’s widely accepted that we won’t see a return to the ultra-low interest rates of the decade leading up to the pandemic," the report said.
"That means that even with some relief, interest rates will continue to have a negative influence on spending and investment decisions in 2024."
The Bank of Canada aggressively hiked rates in the wake of high inflation, bringing its benchmark rate to 5 per cent, the level it has remained at for three consecutive decisions. Economists widely believe that the Bank of Canada is done with interest rate hikes, and that the central bank will soon begin to cut rates as the economy continues to show signs of weakening.
Bond market data are pricing in five 25-basis-point rate cuts by the Bank of Canada, according to Bloomberg calculations, which would take Canada's monetary policy rate from 5 per cent down to about 3.75 per cent.
Some banks see more aggressive cuts on the horizon. TD Economics and CIBC Economics both expect the Bank to cut rates by 150 basis points, bringing the rate to 3.5 per cent by the end of the year.
'A little more deliberate'
Deloitte Canada chief economist Dawn Desjardins said in an interview with Yahoo Finance Canada that the firm expects the Bank to start cutting rates in the spring as soon as the path to 2 per cent is clear, and then cutting "cautiously" through the remainder of the year.
"That caution stems from our view that the Bank doesn't want to stoke another round of upward pressure on inflation," Desjardins said, pointing to the flurry of activity in the housing market that followed the central bank's decision to hold rates in March of last year.
"Unlike the moving up (in rates) where we saw such significant increases in a rapid-fire way, we think the way down is going to be a little more deliberate."
Bank of Canada Governor Tiff Macklem said in an end-of-year speech in December that the central bank needs to see evidence that "inflation is on a sustained downward track" before it can begin discussing cutting its benchmark rate. He says the central bank's Governing Council has not yet discussed rate cuts.
Higher interest rates have already been weighing on the Canadian economy, with GDP on track to decline in the fourth quarter. Deloitte expects GDP to drop 0.5 per cent in the first quarter of 2024 and increase 0.3 per cent in the second quarter, before interest rate cuts spark a recovery in the second half of the year.
"Real economic growth is projected to accelerate sharply then, resulting in an average growth of 0.4 per cent in 2024," the report said.
"The strong gains are forecast to continue into 2025, with the economy posting growth of 3 per cent as consumer spending accelerates and exports benefit from the opening of the LNG Canada export terminal in British Columbia."
Desjardins says the economic recovery will be dependent on the strength of the labour market, and could be a risk to the outlook if it weakens significantly.
"The biggest risk to our view is that we're too sanguine on the labour outlook," Desjardins said.
"Against the backdrop of a household sector that is highly indebted, really feeling the pinch, and seeing rents rise aggressively, all of these factors would cause a more serious retrenchment and perhaps even a more prolonged retrenchment on the consumer side. That would, in fact, result in much more negative economic outcomes."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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