Bank of Canada expected to hold interest rate steady, but tone could offer clues on cuts to come

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The Bank of Canada will make its first interest rate decision of 2024 on Wednesday, with investors and consumers looking for clues as to when they’ll see relief from the high cost of borrowing. Here’s what economists think the governing council of the central bank will have to say:

Royce Mendes, Desjardins

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The decision on what to do with interest rates is a bit of a no-brainer this time around, said Royce Mendes, managing director and head of macro strategy at Desjardins.

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“You don’t need a PhD in economics to determine that the target for the policy rate should remain on hold at five per cent,” Mendes said in a note on Jan. 19, adding that the bank finds itself in a mushy middle where growth and inflation are neither strong enough nor weak enough to warrant either an increase or a cut.

Besides what to do with rates, another important decision faces the bank on Jan. 24: Governor Tiff Macklem and his deputies will have to decide whether to emphasize inflation minus shelter (which is now at 2.4 per cent) or core inflation (which is on the rise) as a guide post for future decisions.

“In determining whether to emphasize the progress on inflation excluding shelter or the stickiness in the core median and trim measures, governing council will effectively be communicating whether or not the door is open to rate cuts in upcoming months,” Mendes said.

Rate watchers will be on the lookout for any shift in tone in the Bank of Canada’s accompanying statement.

Desjardins expects the bank of move off of the “hawkish” tone of its previous statement on Dec. 6 and “lean more dovish,” given feedback from the latest business and consumer outlook surveys that showed inflation expectations have eased.

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Taylor Schleich and Warren Lovely, National Bank of Canada

The Montreal-based economics team from National Bank also expects rates to remain at five per cent — the fourth straight hold from the Bank of Canada following its last hike on July 12.

“Although growth projections will likely be downgraded and all-items CPI forecasts left broadly unchanged, we don’t think Governing Council has seen enough to remove its ‘threat’ to hike more if needed,” Taylor Schleich and Warren Lovely said in note on Jan. 22.

The Bank of Canada adopted a hawkish tone in the statement accompanying its previous decision on Dec. 6, noting that it remained prepared to raise rates if “needed.”

It’s possible the bank could “water down” the threat, but Schleich and Lovely said they “don’t see much upside to dropping that line at this point.”

Economic growth in Canada is slowing, but “stickiness” in core inflation and wages are forcing the bank to stay its hand on rate cuts, the duo believes.

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Tu Nguyen, economist, RSM Canada

Tu Nguyen, like most economists, expects the Bank of Canada to hold interest rates at its current level of five per cent.

She will also be parsing their commentary for signs of a shift in tone from governor Tiff Macklem and his deputies.

“Although the tone would likely shift to neutral, acknowledging the weakening economic conditions, they might feel it too early to signal rate cuts just yet given sticky wage growth and shelter price growth,” Nguyen said in a note on Jan. 23.

The Toronto-based economist believes the bank will start cutting rates in June, by 25 basis points, but believes it should start in April.

“A high interest rate environment is stifling business investment and consumption, which both have shown little to no growth for several months already,” she said. “Restrictive monetary policy will continue to squeeze businesses and consumers in the upcoming months while further dissipating inflationary forces.”

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