Canada likely to see rate cuts before U.S.

The Bank of Canada is expected to keep interest rates unchanged before making cuts in the second quarter of next year, says CIBC’s chief economist. 

Listen to the full podcast on Advisor To Go, powered by CIBC.

In October, the central bank held its key interest rate steady at 5%, but didn’t rule out future rate hikes as its latest projections show inflation remaining higher in the short term. However, CIBC’s Avery Shenfeld said that while inflation remains a concern, the central bank is focusing on allowing the economy to regain its footing.

“I think many of us welcomed the Bank of Canada’s decision to leave rates on hold at its latest meeting,” he said. “It’s clear that inflation is not where they want it to be, but the economy has also clearly gone into a stall in growth.”

According to Shenfeld, the Bank of Canada is taking a cautious approach, waiting for slower growth to create some slack in the economy.

He described the central bank’s monetary policy as steering a car, where the impact of interest rate changes on the economy and inflation takes several quarters to manifest.

As long as the soft patch in economic growth persists and signs of economic slack continue to emerge, he said the central bank is unlikely to raise interest rates further. 

“That should leave them confident that with enough patience, lower inflation will follow,” he said. 

The Bank of Canada’s next rate decision is on Dec. 6.

The bar to start cutting rates, on the other hand, is higher.

Shenfeld said in order for the Bank of Canada to consider cutting interest rates, it will need to see a higher unemployment rate, likely above 6%, along with signs of slowing wage inflation and progress in getting core measures of inflation down.

Canada’s inflation rate fell to 3.8% in September, but underlying price pressures have not eased by much in recent months. Shenfeld argued that headline inflation may not need to return to the 2% target, but other inflation metrics must move closer to this goal before the Bank of Canada considers rate cuts.

Statistics Canada releases October’s inflation figures on Tuesday morning.

Central banks worldwide have also been raising interest rates and have had a moderating effect on Canada’s inflation by cooling commodity prices and slowing export markets. This has also reduced the pressure on the Bank of Canada to further raise interest rates, Shenfeld said.

Other central banks are also in a “watchful waiting mode,” he said.

However, Shenfeld said the U.S. economy has yet to respond significantly to higher interest rates, indicating that the Federal Reserve may take more time before implementing rate cuts.

“In fact, there’s still a risk that the Federal Reserve will hike another time given the fact that the U.S. economy hasn’t materially slowed yet,” Shenfeld said.

He expects Canada to begin easing interest rates in the second quarter of 2024, with the U.S. following in the third or fourth quarter.

Americans are less sensitive to higher interest rates compared to Canadians because they carry less debt and have longer-term fixed-rate mortgages, he said.

“The American economy won’t be as early in needing some relief from lower interest rates as the Canadian economy is likely to be,” he said.

This article is part of the Advisor To Go program, powered by CIBC. It was written without input from the sponsor.