Could this mean a gentler grip on interest rates? Analysts weigh in
The Bank of Canada could be moving closer to cutting interest rates, potentially as early as June, according to analysis from BMO Economics.
While market sentiment remained cautious, softening inflation suggests a shift in policy may be on the horizon.
“We’re not there yet, but it looks as though rate cuts are potentially within sight,” Benjamin Reitzes, managing director at BMO Economics, wrote in a blog post.
February's surprisingly positive inflation report, showing a slowdown across various metrics, has shifted expectations. Core inflation, a key focus for policymakers, is edging closer to its target 2.5% to 2.8 % range.
While an immediate April rate cut remains unlikely, the June meeting is now a strong contender, with further inflation reports to come.
“Instead of seasonal strength, we got cyclical weakness. Every measure of core inflation slowed from the prior month, highlighting the breadth of the move,” Reitzes said. “That suggests an April start to cuts remains a long shot, but June is very much on the table with two more CPI reports coming ahead of that meeting. The market also seems to be coming around to that view, with about [a] 70% [chance] of a 25-bp cut priced in.”
This week, the Bank of Canada revealed its plans to end quantitative tightening (QT) and manage its balance sheet. Deputy Governor Gravelle indicated that QT could conclude by 2025, with bond purchases not anticipated until 2026.
Read next: Canada's economic growth forecast shows regional variances
“Starting with QT, Gravelle repeated that the BoC sees settlement balances ideally in the $20 billion to $60 billion range, which puts the timing for the end of QT in 2025 (potentially late 2024),” Reitzes noted. “The expected changes to the Bank’s balance sheet were, in our view, the more interesting part of the speech.”
The Bank's stance on delaying bond purchases could impact the performance of Government of Canada bonds.
Consumers and businesses could see borrowing costs decrease later this year, potentially easing financial pressures. However, bond investors should brace for potential underperformance as BoC delays resuming bond buying.
“The path toward Bank of Canada rate cuts is starting to clear up, though more inflation progress is likely needed,” Reitzes said. “At the same time, the Bank has provided a high level of transparency on its intentions for QT and the balance sheet.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
