BoC Preview: Interest rate policy expected to remain on pause

Economists expect the Bank of Canada to hold interest rates unchanged when it announces key policy this week, with some saying they expect the central bank to be done raising rates.

The Bank of Canada will announce its decision on interest rates on Wednesday after choosing to keep interest rates at five percent in its previous announcements in October and September.

There seems no reason for the Bank of Canada to raise rates again, so, economists tend to expect economic growth to remain below the expected level in the coming months, which will gradually push inflation towards the 2 percent target. This will give the Bank of Canada a few months before it begins preparing markets for a rate cut, which we expect to begin in April 2024.

It is worth noting that third-quarter gross domestic product (GDP) data included a negative surprise that the economy declined 1.1 percent during that period. The reason why the Canadian central bank raised interest rates in June and July was because of higher growth in the first quarter amid increased demand for housing.

This rise “was short-lived” and that spending, job increases and inflation have slowed since then. In June, the Bank of Canada raised interest rates by 25 basis points to 4.75 per cent and repeated this in July, bringing the policy rate to five per cent.

Growth in the second quarter was significantly revised upward to a rise of 1.4 per cent.

After a surprise downward GDP surprise in the third quarter, a review of the second quarter and a “decent start” to the fourth quarter. Some analysts also believe that the third quarter GDP numbers “will do little” to change the Bank of Canada’s confidence in the expected timeline.

The Bank of Canada may even announce its first interest rate cut in April 2024 to avoid a deeper recession than necessary.

Unemployment rate

Statistics Canada reported last Friday that Canada’s unemployment rate rose to 5.8 per cent last month, as higher interest rates weighed on new job creation amid population growth.

Nguyen said in a note on Friday that weak third-quarter GDP numbers coupled with the November jobs report should shift focus from price increases to price cuts, provided inflation remains under control.

The unemployment rate has been trending upward since April this year as data is painting a mixed picture that appears to be ending as most economic data currently point to an economic slowdown. In the future, the economy may still be adding jobs, but unemployment will rise to six percent in early 2024.