11/22/2024
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Posted in Canadian Economy and Interest Rates by Vanguard Realty | Back to Main Blog Page
Various signs point to the Bank of Canada (BoC) cutting interest rates by another half percentage point in December, even if the bank hasn’t said so explicitly, CIBC economists say.
A research note, authored by economist Ali Jaffery and published this week, offers ways to “read the tea leaves in this easing cycle.” It identifies patterns in the BoC’s language and behaviour that may define its intentions in spite of its “cautious communications approach.”
In addition to dropping the overnight rate 50 basis points to 3.25 per cent at its December 11 announcement, CIBC also expects the BoC to bring the rate to 2.25 per cent by mid-2025, “a bit below” the neutral rate.
The federal government’s proposed GST reprieve and spring rebate cheques are “not material enough” to alter the projections, CIBC chief economist Avery Shenfeld told Yahoo Finance Canada in an interview. Other bank economists have differed on the potential impact.
In the research, Jaffery first notes that the “size and direction” of the BoC’s policy moves seem to reflect how closely inflation and GDP data align with its projections. In general, if the data are more surprising, the BoC’s response is more pronounced.
In recent months, inflation has dropped “faster than the BoC expected,” Jaffery writes — falling by an average of 0.2 percentage points more than the BoC forecast in three Monetary Policy Reports. “That’s not massive, but it’s material,” Jaffery says, noting that from 2012 to 2019 the BoC “never had three consecutive one-sided errors,” with the average gap between forecast and observed inflation near zero.
Jaffery goes on to observe that the BoC “appears to attach more weight” to Canada’s economic performance to GDP-based data than labour-based data. “That’s evident from the fact that they put so much emphasis on the GDP-based output gap as their main measure of slack and don’t publish any real-time forecasts of any labour metric,” he writes.
With that in mind, the research notes that the latest GDP-based data shows “material slack in the economy,” offering another clue about the BoC’s deliberations.
The bank also considers various economic risks that aren’t as easy to model or survey, Jaffery writes, “such as how house prices will respond to rate cuts or how geopolitical forces affect Canadian inflation.” Although BoC governor Tiff Macklem has described upside and downside inflation risks as “reasonably balanced,” CIBC argues that the language used in BoC minutes says otherwise.
Using an “in-house artificial intelligence tool,” CIBC analyzed BoC’s deliberation summaries and found downside risks have been increasingly earning more attention. “Discussions of downside risks reached their peak in September, presaging the 50bp cut in October,” the research says.
Although mentions of downside and upside in October were roughly even, “announced cuts to immigration and the Trump election victory both came after the October MPR, and only add to the downside column,” Jaffery writes.
All of these signs already support a forecast for another large cut, the paper says. “Added to that, inflation expectations are anchored, five-year bond yields have risen and energy prices have come down again,” Jaffery writes. “For us, that still warrants some urgency to get rates down quickly.”
CIBC believes that once the overnight rate hits 2.25 per cent, it will “stay there for some time to allow growth and the job market to heal.”
Source: Yahoo Finance Canada
Bank of Canada, Bank of Canada Benchmark Rate, Interest Rate Forecast, Interest Rates
