The Bank of Canada meets eight times in 2024 and right now the market sees five or six rate cuts.
The first question is when will they start? The next BOC meeting is right around the corner on January 24 but it comes on the heels of a surprisingly-hot inflation report. CPI rose 3.1% year-over-year compared to 2.9% expected and the core measure were hotter-than-anticipated as well.
However that’s not the last word. The December CPI report will be released on January 16 and there should be some help on the core side as a 0.3% rise from December 2022 rolls off. However, the y/y headline number is likely to rise even further as a -0.6% reading from a year earlier is pushed out of the equation. That could push headline CPI upwards of 3.5% a tie BOC Governor Tiff Macklem’s hands.
A month later it’s the opposite as a high headline number disappears but a low core measure should keep it elevated.
All the year-over-year numbers will finally get some help with the February CPI report and that’s when a real downtrend will take hold. However that data point won’t be published until after the March 6 BOC meeting.
That meeting is priced at 45% for a cut right now and that sounds about right. I can easily see the BOC waiting to see how those CPI numbers fall and leaving rates on hold until the April 10 meeting.
The case for them to cut is also compelling and it partly hinges on an expectation that they will look south for cues. The FOMC meets March 20 so they will have to wait, right? I don’t think so. The Fed always strongly signals what it will do before the meeting and the blackout starts March 8, so there is a good chance the BOC will know what the Fed is going to do. Right now the March Fed meeting is at 100% so in a situation where that doesn’t change, I would expect the BOC to step to the front of the line. Also note that the March ECB meeting comes a day after the BOC.
In any case, the April 10 will certainly be live. Current pricing is at 100% — almost exactly — with the June 5 meeting pricing in 72 bps from now.
Turning back to the CPI numbers, the headlines were so hot from Jan-May 2023 and those will slowly roll off. So by the time we get to next June, we could be looking at very low Canadian CPI numbers.
In the four remaining meetings in 2024, cuts are fully priced for three of them with a 40% of a fourth.
That takes us back to housing, by June we’ll have a very good idea of how the spring housing market goes. If banks continue to be reluctant to pass on lower market rates, then we could have trouble. Odds are that we get at least moderate pain and at that point, I think the BOC blinks and 50 bps cuts start. I will also be closely watching Canadian consumer spending, which has been stumbling.
What about 2025?
The OIS market is now pricing in about 225 bps in cuts in total through 2025, which would get the BOC to 2.75%. I think they end up at 1.75%, which is where they were in 2019 before the pandemic.
In contrast, here are the forecasts from the Canadian big banks, via Steve Hueble at Canadian Mortgage Trends: