Market Insight for July 28

A survey of market experts says the Bank of Canada will unlikely hike interest rates again for the remainder of the year, and is expected to start cutting rates next spring, according to a report of economists and market participants released by the central bank this week.

The central bank’s second-quarter survey, released Monday, found that most respondents — senior economists and strategists involved in Canadian financial markets — forecast that the Bank will hold its key overnight interest rate at its current 22-year-high of five per cent for the rest of the year, and will not start to cut rates until March 2024.

Economists say future hikes remain on the table if the Bank of Canada still thinks it’s necessary in its bid to bring inflation down to its two per cent target. “There are no interest rate hikes expected going forward, but that’s very much contingent on seeing signs of the economy softening and lower inflation pressures,” said RBC assistant chief economist Nathan Janzen.

“It’s pretty clear that (the central bank) is very cautious about trying to cut interest rates too quickly and they want to ensure that inflation is firmly back on a track toward their two per cent inflation objective.”

Last March, the Bank of Canada began an aggressive rate-hike campaign in a bid to drive inflation down. Before the campaign, the overnight rate sat at 0.25 per cent. Inflation peaked at 8.1 per cent last June but has since dropped to 2.8 per cent. The last time it fell below three per cent was in March 2021.

But the central bank doesn’t expect inflation to come down to its two per cent target until the middle of 2025, six months later than it had previously forecast. In the Bank’s survey release, the median forecast for annual inflation is for three per cent at the end of 2023, compared with 2.7 per cent in its previous survey.

Some economists have argued that the bank of Canada has gone too far with its rate-hike campaign and that there needs to be more patience, as it takes time to see the impacts of rate hikes on the economy and households.

“It’s completely unnecessary,” said David Macdonald, a senior economist with the Canadian Centre for Policy Alternatives. “The rate hikes that we saw this summer won’t have an impact on the economy for a year and a half to two years, and probably sometime in 2025. There are huge delays in terms of how these things get baked in.” The theory is that by doing so, consumers and businesses will spend less, driving prices down and slowing the economy.

While that process is meant to bring inflation down, its effect has been driving up the interest Canadians pay on their mortgages and other loans. Macdonald warns that soaring interest rates can drive inflation “in critical areas like mortgage interest costs and rent.”

The Bank of Canada’s next rate decision is slated for Sept. 6. The central bank has suggested that it will make its rate decisions based on incoming economic data and has tried to discourage any hopes of rates getting lower.