The Bank of Canada dangled some hints that interest rate cuts are coming later this year but offered no clear indications on when that might be.
With that, CIBC left its forecast for the first cut in June and 150 bps in total cuts, with a 50 bps cut possible at some point. They say that with a stumble in growth or inflation, April could be on the table (the market sees April as 50/50).
CIBC noted some clear hints at lower rates, including 0.8% GDP growth this year weighted to the back half of the year.
"The pick-up in growth projected for the back half of the year is likely tied to their own expectations for lower rates at that time, since the Governor noted that the meeting has shifted from a discussion of whether rates are high enough, to one about how long they need to keep rates at 5%," CIBC wrote.
What might make it tougher for the BOC to cut sooner is that Macklem is forecasting flat growth in Q4 while CIBC has it at +0.8%. It's not a huge difference and they say it will net out with softer Q1 growth but that data won't be out until April/May.
CIBC also notes that wage inflation remains high, but is likely to decrease due to increased labor market slack and the potential for higher labor costs to be offset by reduced profit margins, in line with a weak domestic demand outlook.
"We see no reason to alter our call for the first (quarter point) cut to come in June, and for the Bank to surpass market expectations by delivering a total of 150 basis points in cuts by the end of this year. The second cut could well be a 50 basis point move to really get the ball rolling, given that rates will still be at elevated levels at that point. We'll need that relief to drive the pick-up in growth that the Bank projects, and avoid a much harder landing. The timing of the first cut can come well before we see a 2% inflation rate if, as we expect, by mid-year most of gap between actual inflation and the Bank's target lies in the shelter component."
I think markets are increasingly pricing in a hard landing for Canada and that's why the loonie fell today, not because it was a dovish statement. However that signal may be obscured by China shifting to a more stimulative stance and broader USD weakness.
