BoC to cut rates in June; risks skewed towards later cut: Reuters poll

By Indradip Ghosh

BENGALURU (Reuters) - The Bank of Canada is forecast to cut its overnight interest rate in June, according to a majority of economists polled by Reuters who said the greater risk was the first reduction would come later than they expect rather than earlier.

The timing roughly coincides with when the U.S. Federal Reserve and the European Central Bank are expected to deliver their first cuts following a pause after a campaign of rapid rate rises to tamp down an inflation surge in the wake of the pandemic.

Inflation in Canada has fallen to 2.9% from a peak of 8.1% in June 2022 and is now just within the BoC's 1-3% target range. But policymakers are not yet convinced it is completely under control, despite a recent slowing in economic output.

Shelter cost inflation, which makes up about one-quarter of the index used to measure overall inflation, remains elevated. There is a risk that cutting rates too soon could reignite price rises in Canada's already-expensive housing market.

Canada's economy grew 1.0%on an annualized basis in the fourth quarter, higher than analysts' expectations, according to data on Thursday. The stronger-than-expected rebound indicated the central bank could keep rates on hold for longer to fight inflation without leading the economy into recession.

Over 60% of economists, 19 of 31 in a Feb. 26-28 Reuters poll, expect the BoC to cut its key rate by 25 basis points to 4.75% in June, mostly in line with market pricing. While seven said the first cut would come in the second half of 2024, only five said it would come in April.

"The risk is the first rate cut will come later than June...If the Bank is going to make an error here, it's that they'll keep policy too tight for too long to make sure inflation is headed back towards their target or even lower," said Douglas Porter, chief economist at BMO Capital Markets.

"They're also concerned about a renewed pickup in the housing market, and just more recently, they've got the added wrinkle the Canadian dollar has started to weaken again."

If the survey predictions are realised, the BoC will be the first among major central banks to start cutting as policymakers are scheduled to meet in June before the Fed and the ECB.

A further weakening in the Canadian dollar, which has already declined over 3% against the greenback this year, could lead to an unwanted surge in imported inflation and may give the BoC more reason to be patient.

Also, a spike in home prices could worsen the inflation outlook. Home prices are set to rise over the coming years as housing supply remains constrained and many already expect a series of interest rate cuts, a separate Reuters poll showed.

Asked what is more likely around the timing of the first rate cut, a 75% majority, 15 of 20 economists said the greater risk is the BoC would cut rates later than they currently forecast rather than earlier.

Although there was no clear consensus around the number of rate cuts coming this year, nearly 70% of economists, 21 of 31, predicted 100 basis points of cuts or less year, including nine who forecast rates above 4.00% at end-2024. That was in line with how much easing the Fed is expected to do.

Of the 30 common contributors between the latest two surveys, 11 economists now expect fewer rate cuts this year while 19 kept their outlook unchanged. None expected more.

Although 11 of 14 economists said the magnitude of interest rate cuts could be less than they expect this year, the poll median showed the rate would decline to 3.25% by mid-2025, higher than 3.00% predicted in a January survey.

"The reality is prices have gone up a lot in the last three years and the psychology of inflation has changed," added BMO Capital Markets' Porter. "It will take some time to get that psychology turned back towards people really believing inflation has been tamed."

(For other stories from the Reuters global economic poll:)

(Reporting by Indradip Ghosh; Polling by Purujit Arun; Editing by Ross Finley)