To cut or hold interest rates — all eyes are on the Bank of Canada
This Wednesday’s rate-setting announcement will be closely watched for the obvious reason that some expect the Bank of Canada to cut rates for the first time since it began cranking them up in March 2022.
A less obvious reason is that a failure to cut or at least signal that a trim is coming very soon risks grinding the economy to a harmfully slow pace.
“It would be a mistake to maintain this degree of pressure on the economy now that inflation is decelerating sharply,” said Avery Shenfeld, chief economist at CIBC Capital Markets, adding that a cut to the current five per cent overnight rate would be “well justified” in June.
“Standing pat for too long while inflation tumbles risks dishing out more economic pain than necessary to hit the two per cent (inflation) target,” he said.
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The Canadian economy grew at an annualized rate of 1.7 per cent in the first quarter, according to a Statistics Canada report Friday, which was below the Bank of Canada’s latest forecast of 2.8 per cent and economists’ estimates of 2.2 per cent. What’s more, the previous quarter’s growth was revised downward to 0.1 per cent from one per cent.
Still, not everyone is betting on a rate cut and market watchers expect some volatility regardless of whether there’s one or not.
James Orlando, a senior economist at Toronto-Dominion Bank, said Bank of Canada governor Tiff Macklem and his policymakers have prided themselves on transparency, but there hasn’t been a clear signal that the tide will turn on June 5, despite economic indicators signalling the time is right.
“We have been arguing for months now that inflation dynamics have been justifying rate
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