Benjamin Tal speaks on stage holding a microphone

Canada’s top banker predicts a rate cut in June with more to come in 2024

Canadians have been waiting for the news that, after a series of interest rate hikes that began all the way back in March 2022, the hikes are finally over and rate cuts are coming — and, a few weeks out from the Bank of Canada’s (BoC) next interest rate announcement, it appears that time is finally here.

“Things are moving in the right direction; we got the inflation numbers today, and they were even better than expected,” Benjamin Tal, deputy chief economist at CIBC, said. New data from Statistics Canada showed that the consumer price index in Canada cooled to 2.7 per cent in April, a three-year low for the inflation rate.

“This has major implications regarding the timing and the magnitude of the cut by the Bank of Canada. There is a more than 60 per cent probability now that June will be the first move,” Tal said. “And that’s good news, because the BoC, in my opinion, is already overshooting by about 50 basis points. The earlier they cut interest rates, the better it is for the economy.”

Tal noted that the labour market is slowing down in Canada, with the economy in a per capita recession and inflation behaving. “There’s no reason not to cut.”

He is predicting a cut of 25 basis points, to 4.75 per cent, in June. “If they move in June, there may be another rate cut in July, and maybe another in September,” he said.

Tal believes the interest rate will bottom out in 2025, at around 3-3.75 per cent.

But he cautioned that there’s one major factor that may influence the BoC and upcoming rate cuts. The U.S. is doing well fiscally, Tal said, with President Biden spending more and lifting the economy. Most importantly, the U.S. has 30-year mortgages versus Canada’s five-year mortgages, so they have a reduced sensitivity to high interest rates.

That means monetary policy works more slowly in the U.S. “If the Bank of Canada starts cutting interest rates, and the Fed [U.S. Federal Reserve] is not ready to cut interest rates, how much can the BoC can divorce itself from the Fed?” he said. “The short answer is about 50 basis points. Beyond that, it’s complicated, because it will put more and more downward pressure on the value of the Canadian dollar.”

Tal also said the BoC will be wary of spring 2023 repeating itself, when the possibility of a pause in rate cuts caused the housing market to heat up. The Bank responded with a rate hike of 25 basis points in June. “This real estate market could limit future cuts by the Bank of Canada,” he said.

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