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The Bank of Canada’s final rate decision of the year is expected to be uneventful, with markets and economists overwhelmingly predicting a third straight rate hold.Markets have now shifted their attention from the possibility of further rate hikes to forecasting the timing of the Bank’s first rate cut following the Q3 GDP contraction and growing concerns about rising loan delinquencies.“Markets are pricing non-trivial odds of a rate cut as soon as March, even though the BoC has provided exactly zero hints of a shift just yet,” noted BMO’s Benjamin Reitzes.However, with inflation still above the central bank’s target level, economists expect a “hawkish rate hold” from the Bank’s Governing Council when it meets on Wednesday.“We don’t expect a material change in tone at the December meeting…mild hawkishness highlighting that inflation remains well above target,” Reitzes added.Scotiabank economist Derek Holt argues that the Bank will need to address the market’s aggressive rate-cut pricing, or else “they are at risk of repeating what happened earlier this past spring all over again.”At that point, two rate holds by the Bank of Canada prematurely triggered expectations that the rate-hike cycle was over, leading to a short-lived run-up in home prices and upward inflationary pressure.“Market pricing is assigning significant probability to a rate cut at the January 24 meeting such that a mere indifferent shrug of the shoulders this week could leave the BoC vulnerable to runaway cut pricing over the ensuing seven long weeks,” Holt wrote.That, in turn, could “unleash greater inflationary pressures through another powerful housing boom” come the spring. This is why Holt hasn’t ruled out a “low, but non-zero” probability of a final rate hike.“That would shock markets, but they wouldn’t so much care if they felt it was the right thing to do,” he said. “The BoC does have a tendency to surprise markets as we’ve seen several times during the cycle.”
What the forecasters are saying…
On inflation:
- ING: “…inflation remains well above the BoC’s target and the [last] statement mentioned ‘broad based’ pressures, with rising gasoline prices meaning headline inflation is likely to stay higher than the BoC was forecasting in the near term.” (Source)
On GDP forecasts:
- TD: “We expect below-trend economic growth to continue over the coming months, which will push inflation gradually closer to the 2% target. This will give the BoC a few months before it starts to prepare markets for rate cuts, which we expect will start in April 2024.” (Source)
On rate-cut expectations:
- BMO: “While markets will be looking for any hints of rate cuts, policymakers aren’t likely to provide any with inflation still well above target. That will likely change as we make our way through 2024 and inflation continues to slow, but we’re not there quite yet.” (Source)
- RBC: “While we’re expecting a dovish lean from the BoC relative to past interest rate decisions…we don’t see the BoC rushing to cutting rates…We expect the BoC will stay on hold through the first half of 2024 before moving to rate cuts in Q3 next year.”
On the BoC rate statement:
- National Bank: “A softer tone should permeate the rate statement…Look for the Bank to reiterate that higher rates are working to slow demand and ease inflation. We might also see the statement explicitly state there is evidence that ‘rates may now be restrictive enough,’ as Macklem remarked in a November speech.” (Source)
- Scotiabank: “…the BoC could rely upon the speech the day after this decision in order to indirectly guide that markets are getting too aggressive in pricing rate cuts…” (Source)
The latest big bank rate forecasts
The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.Target Rate:Year-end ’23Target Rate:
Year-end ’24Target Rate:
Year-end ’255-Year BoC Bond Yield:
Year-end ’235-Year BoC Bond Yield:
Year-end ’24BMO5.00%4.50% (-50bps)NA4.10% (+20bps)3.65% (+30bps)CIBC5.00%3.50%2.50%NANANBC5.00%4.00%3.00%3.85% (-45bps)3.35% (-35bps)RBC5.00%4.00%NA3.90%3.30%Scotia5.00%4.00%3.25%4.30%3.50%TD5.00%3.50%2.25%4.30%3.30%
