In its rate announcement on Dec. 6, the Bank of Canada indicated that the economy is worsening but not so much that interest rates need to be cut. The central bank said it is prepared to raise the policy rate further if needed, however, many economists believe that further rate hikes are not necessary as recessionary conditions are developing. For instance, gross domestic product (GDP) on a per capita basis has been in a recession since late 2022.
Economists are concerned about declining productivity, which has dropped for a sixth consecutive quarter. David-Alexandre Brassard, chief economist of Chartered Professional Accountants of Canada said he believes that hiking rates further while the inflation issue is primarily in housing is odd.
BMO chief economist Doug Porter said that despite financial markets pricing in rate cuts, there does not seem to be an appetite for them at the Bank of Canada presently. Tony Stillo, of Oxford Economics, notes that further rate hikes are unnecessary since the recession continues to develop. He also said that the phrase “inflationary risks have increased” was not mentioned in the central bank’s December statement, but that the BoC said it wants to see “further and sustained easing in core inflation.”
The Bank of Canada also pointed to economic growth contracting at a rate of 1.1 percent in the third quarter and said consumption growth in the last two quarters was basically flat. The central bank said that business investment has been “essentially flat over the past year.”
While the C.D. Howe Institute’s monetary policy council and TD are anticipating rate cuts, CIBC believes the first rate cut will come later than what market pricing indicates. Chief economist Avery Shenfeld said in a Dec. 6 note that CIBC sees the overnight rate target at 3.5 percent by the end of 2024. Financial markets have rallied since the Bank of Canada’s previous interest rate decision in October on the hopes of rate cuts as inflation comes down and the potential to avoid a recession.