Bank of Canada's Interest Rate Stability
Economists surveyed by Reuters anticipate that the Bank of Canada (BoC) will maintain its key interest rate at 4.50% for the remainder of 2023. The likelihood of an interest rate cut by year-end has diminished since a poll conducted a month ago.
Factors Affecting Rate Cut Expectations
Although market concerns persist over the U.S. and European banking sectors, Canada's economy and labor market has performed better than expected. BoC Deputy Governor Toni Gravelle has emphasized the Canadian banking system's stability, indicating that policymakers are more concerned with inflation and economic performance.
Conditional Pause in Rate Hikes
The BoC halted its aggressive rate-hiking cycle in March and entered a conditional pause. All 33 economists polled between March 31 and April 6 predict the overnight rate will remain at 4.50% on April 12.
Forecasters' Expectations for 2023
Out of 31 forecasters, 23 expect the rate to stay unchanged throughout 2023, while only seven predict a 25-basis-point rate cut by year-end. Derek Holt from Scotiabank argues that the Canadian economy's fundamentals do not support market pricing for rate cuts later this year.
Inflation and Economic Growth
With inflation at 5.2%, it is more than double the BoC's 2% target and unlikely to reach it until at least 2025. The economy exhibited better-than-expected growth in January, and a 1.7% growth was forecasted for the last quarter, surpassing previous predictions and BoC's expectation of 0.5% growth.
Challenges for the Bank of Canada
Factors such as an expansionary federal budget and rising oil prices could pressure inflation higher than desired, making the BoC's job more difficult. In a supplementary question, 10 of 13 economists believe the bigger risk is higher-than-expected inflation in 2023.
Economists Divided on BoC's Next Move
In response to a separate question, economists were divided on whether the BoC would hike or cut rates this year. Robert Both from TD Securities suggests that strong economic momentum might push the BoC towards tightening later in the year.
Canadian Dollar Outlook
The Canadian dollar is expected to rise over the next year as the export-driven economy avoids a hard landing and the U.S. dollar weakens due to a narrowing rate gap with other currencies.