Economists are calling for the Bank of Canada to hit pause on interest rate hikes this week as the economy shows signs of overall cooling.
Most economists surveyed by Bloomberg expect the central bank will keep its overnight lending rate at five per cent when it announces its next rate decision on Wednesday.
The nearly unanimous call comes after the Canada’s gross domestic product (GDP) shrank at a 0.2 per cent annualized pace in the second quarter of 2023, according to the latest Statistics Canada figures – signalling that an economic slowdown has begun.
“Last week’s surprise contraction in Q2 GDP cemented our call for a pause this week, and that the hiking cycle is done,” Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Capital Markets, wrote in a note to clients on Tuesday.
Inflation data from Statistics Canada as of July put the country’s inflation rate at 3.3 per cent, higher than the central bank’s target rate of two per cent. However, a weakened economic backdrop should restore policymakers’ confidence that inflation will return to the desired rate over time, Reitzes said.
Reitzes is forecasting that the Bank of Canada will hold rates until 2024, but he cautioned that he expects the bank will continue to leave the door open for further rate hikes, should signs of growth emerge while inflation remains stubborn.
‘MORE PAIN IN STORE’
The general consensus is that economic weakness will continue in the months ahead, Royce Mendes, managing director and head of macro strategy at Desjardins, told BNN Bloomberg in an email on Tuesday.
“Given that many Canadians have yet to renew their mortgages in this higher interest rate environment, there’s more pain in store for the economy as time passes,” he said.
That catch-up phenomenon, coupled with the aggressive rate hike cycle the bank carried through in the last few months, should slow the economy even further, Mendes added.
“The Bank of Canada will view the recent string of weak economic data as enough of a reason to hold back on raising rates further,” he said.
Another reason the Bank of Canada will likely choose to hold rates this week is the risk of overtightening, according to Avery Shenfeld, chief economist at CIBC Capital Markets.
“I think now that you’ve seen the unemployment rate moving up, you’ve seen the economy not growing, the balance of risks is that if you keep hiking, you’re over doing it,” he told BNN Bloomberg in a television interview on Tuesday.
“It would take a very brave and maybe foolhardy central bank to continue to with rate hikes without having more data to show how far this slowdown is going to extend,” he added.
Shenfeld cautioned that while it will likely take several more quarters to see inflation reach the Bank of Canada’s preferred target rate, any further hikes could run the risk of tipping Canada into a serious recession.
“Unfortunately, to get inflation all the way to two per cent is a little bit of a story of no pain, no gain,” he added.
The economy will need to suffer through a heightened interest rate environment in order to get inflation down, Shenfeld said.
“The Bank of Canada is likely to leave interest rates where they are, let the economy sort of stall, maybe not an outright recession, but struggle a bit, and then bring relief in the spring once inflation is a little lower,” he said.