Bank of Canada Next Move to Be a Rate Cut: ING

By Ketki Saxena 

Investing.com – Bank of Canada’s announcement earlier today to hold rates at 4.50% came as little surprise. The move had been widely expected by economists and nearly fully priced in by markets after the Canadian central bank clearly signaled a conditional pause in January, and data since then (including 0% Q4 2022 GDP Growth) did little to lower the bar for further tightening. 

The big question however, is what comes next. Prior to the Bank of Canada’s announcement today, markets were pricing in one more hike by the BoC this year, particularly as expectations for further tightening from the US Federal Reserve ramped up.

After the announcement however, the overnight Index Swaps curve is no longer pricing in a 25bp rate hike at the July meeting. 

Some analysts, including those at ING Economics, are now calling that the Bank of Canada’s next move will be a rate-cut. 

Analysts at ING Economics note, “The Bank observed that restrictive monetary policy is already showing its effect on the Canadian economy, and sees a path for a return to 3% inflation by mid-2023. The option for a new hike is open, but we doubt that will be necessary, and the next move should be a cut.”

The report also touched on the “increasingly stark” diverge between Fed and BoC monetary policy. 

“While BoC acknowledges that the labour market “remains very tight”, it doesn't have the same fears as the Federal Reserve that this will keep inflation pressures elevated.” 

Unlike the Federal Reserve - with Chairman Jerome Powell in his Congress testimony reiterating the need for further tightening to cool inflation - the BoC believes that “weak economic growth for the next couple of quarters” will help inflation to “come down to around 3% in the middle of this year”.

Compared to the Fed, ING Economics analysts believe that the Canadian central bank is more likely to err on the side of under tightening, given that the Canadian economy is more sensitive to interest rates, in part due to Canadian’s greater exposure to interest rates.

“Canada’s high household debt levels and greater exposure to interest rates rate hikes via a higher prevalence of variable rate borrowing make the economy more at risk of a deeper downturn than the US. For example, in the US the 30Y fixed rate mortgage is the most common borrowing method while in Canada it is five years or less before it faces a change in interest rate.”

“As such, the next move is more likely to be an interest cut in our view.”

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