The Bank of Canada will hold interest rates at current levels even as the US Federal Reserve pushes borrowing costs higher, economists say.
(Bloomberg) — The Bank of Canada will hold interest rates at current levels even as the US Federal Reserve pushes borrowing costs higher, economists say.
Governor Tiff Macklem will keep the central bank’s benchmark overnight rate at 4.5% on March 8 and then for most of this year, according to the median response in a quarterly Bloomberg survey of 17 economists. Policymakers will start cutting rates at the beginning of 2024 as inflation nears the 2% target, they say, though a minority of analysts see the bank easing this fall.
The results reveal a split between the consensus views of economists and the prevailing outlook in financial markets. Traders in overnight swaps are betting the Bank of Canada will eventually deliver another quarter-percentage-point hike at some point this year.
The poll also underscores widespread agreement that Macklem’s declaration of a conditional pause at the central bank’s January meeting was the right move, with two-thirds of respondents saying they agree with the decision to explicitly signal a hold.
About the same proportion of economists see a soft-landing as the most likely outcome in Canada, and a majority expects inflation will return to target at some point in 2024, matching the bank’s most recent forecast. Still, 29% see a hard landing as the base case. Bloomberg’s last monthly survey suggests flat growth for most of this year.
In the US, short-term money markets are betting that Chairman Jerome Powell will raise the Fed funds rate to between 5.25% and 5.5%. That would test Macklem’s resolve, as economists say the Canadian central bank can only comfortably diverge policy by up to 100 basis points — the same view as the December poll.
But the Bank of Canada has downplayed fears of diverging from its peers in how it reins in inflation. “We shouldn’t be too concerned if Canada follows a slightly different path to normalization than our counterparts,” Deputy Governor Paul Beaudry said in speech last month, adding that “what matters most is getting all the way there.”
Inflation has slowed to 5.9% from last year’s peak of 8.1% — still nearly three times the central bank’s target. But Macklem’s officials forecast it will reach 3% by midyear and return to 2% in 2024.
Other Highlights
- Nearly three-quarters of respondents said the Bank of Canada’s first iteration of a minutes-like summary of deliberations included useful or worthwhile information. A summary of policy discussions for next week’s decision will be published on March 22
- Respondents are still split on whether the central bank’s reputation has been dented by the surge in inflation and resulting policy about-face, with half of economists saying credibility has been lost over the past year
- Policymakers will keep their estimate of the neutral rate at its current level, between 2% and 3%, when the range is updated in the April monetary policy report, according to 10 of 16 economists who answered that question
- The survey shows little consensus about whether policymakers would hike more than a standard 25 basis point if they were forced to break from their conditional pause. Seven of 16 respondents to the question say policymakers would hike by at least half a percentage point
(Updates with Beaudry quote on divergence and inflation forecast.)
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