Poll: Bank of Canada to cut interest rates on June 5, three further times this year

The Bank of Canada will trim interest rates to 4.75% on June 5, according to three-quarters of economists in a Reuters poll which showed three further cuts this year, with the last one hanging on a knife’s edge.

Although inflation has been within the central bank’s 1%-3% target for a few months, the poll results underscore questions on how much the BoC can diverge from the U.S. Federal Reserve, which is expected to wait until at least September and possibly even later.

Economists’ forecasts, which tend to lag financial market bets, are currently more aggressive than market pricing, which has only factored in two BoC cuts this year.

Just over 75% of economists in a May 23-29 poll, 22 of 29, predicted the BoC would cut its key interest rate by 25 basis points to 4.75% on June 5. Financial markets have priced in slightly more than a 60% chance of that.

“The door is open for a BoC rate cut, and we have been leaning to a June move,” said Douglas Porter, chief economist at BMO Capital Markets.

“But it remains a close call, and when the Bank does eventually move it will be gradual, with a highly patient Fed acting as a limiter on how far and how fast Canadian rates can fall.”

Six of 29, including two of the top Canadian banks, TD and Scotiabank, said the BoC would wait until the July 24 meeting, when it releases its next quarterly set of forecasts. One said it would wait until September.

Governor Tiff Macklem said earlier this month policymakers need to see disinflation continue “for longer to be confident that progress toward price stability will be sustained.”

“We still view July as more likely than June for the first cut, given the impact of one-time drags in recent (inflation) data and signs of stronger growth momentum over Q1,” said Robert Both, senior macro strategist at TD Securities.

But even with a later start, he expects the BoC to deliver four interest rate cuts this year.

While the overwhelming majority of economists expect at least three rate cuts this year, the median forecast for an end-2024 rate of 4.00% – four cuts – was a very close call.

Fourteen of 29 economists forecast rates at 4.00% at year-end and one said 3.75%. The remaining 14 said 4.25% or higher by end-2024.

Some economists are concerned that expectations of a series of rate cuts could reignite property prices, which would pressure living costs. But for now, forecasts for house price inflation are subdued.

A separate May 9-23 Reuters survey of 13 property market analysts predicted median home prices will rise just 1.5% this year and 3.3% in 2025, although forecasts for this year ranged from -4.0% to 3.5%.

Average home prices more than tripled in nearly two decades and surged over 50% during the COVID-19 pandemic.

Asked what would happen to the pace of supply of affordable homes over the coming two to three years, all but one said it would fall short of demand.

A 75% majority, 9 of 12, said the government should be more involved in improving affordability.

“The federal government should think bigger by providing programmes and support the homeownership market,” said Sebastien Lavoie, chief economist at Laurentian Bank.

“Most recent policies are targeting rentals. This is a good step but the critical demand-supply gap requires a wider range of incentives going beyond the rental market.”

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