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Posthaste: Risks the Bank of Canada will hold off until July to cut interest rates just got higher Back to video

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Just a week before the Bank of Canada decides on interest rates new evidence has some economists questioning their forecasts on the first cut — and this time it comes from the central bank itself.

Inflation expectations in the Bank of Canada’s business and consumer outlook surveys yesterday showed improvement, but they are still high, raising the possibility that the policy makers may wait until the next survey before making a move, said Stephen Brown, Capital Economics Ltd.’s deputy chief economist for North America.

That survey comes out July 15, which would mean the central bank would have to hold its interest rate until its July 24 meeting, which goes against the current consensus call for a June cut.

Inflation expectations “are still too high and raise the risk that the bank will wait to see developments in the next surveys in July before it cuts interest rates,” Brown said in a note.

The survey revealed there is work to be done on the inflation front.

While Canadians believe inflation has slowed, their expectations in the near term have barely changed, the Bank of Canada said.

Moreover, their expectations for long-term inflation, five years from now, have actually increased, with respondents believing that high government spending and lofty home and rent prices will take longer to resolve, the survey said.

Interestingly, the Canadians surveyed perceived inflation to be at 5.3 per cent, much higher than the actual latest reading of 2.8 per cent, with 60 per cent of them saying food prices were a big part of that perception.

Brown said the recent easing of food price inflation may lower those expectations in the next survey, but the high rate of rent inflation and a rebound in gas prices may limit the decline.

“At the margin at least, the quarterly surveys may persuade the bank that there is no rush to loosen policy,” he said.

Capital still maintains its forecast of a June cut, but said “the risks are tilted toward a slightly later cut.”

There was progress on how businesses perceive inflation with the share of companies expecting the consumer price index to be above three per cent over the next year falling to 40 per cent from 54 per cent, but that is still above pre-pandemic levels.

“The improving trends will be welcomed by policymakers, but aren’t enough to prompt rate cuts just yet,” Benjamin Reitzes, a strategist at the Bank of Montreal, said. “A June ease remains in play, but we’ll need to see the next couple of CPI prints register a further slowing in inflation.”

The survey is the second indicator in just a few days that has cast shade on hopes for a June rate cut.

Data out last week showed that Canada’s economy had grown faster than expected in the first two months of the year, beating the Bank of Canada’s own forecasts.

Marc Ercolao, an economist at Toronto Dominion Bank, said the “robust” figures present a difficult challenge for the central bank.

“Market pricing is still hopeful of a first interest rate cut happening in June, though we think a July cut is more likely,” he said in a note.

We get two more data releases this week before the Bank decides on April 10 — international merchandise trade and the jobs report Friday — but economists are not expecting to see a game-changing downturn in either.

“At this point, we are clinging to our call of four rate cuts, beginning at the June meeting,” BMO chief economist Douglas Porter said after gross domestic product data came out last week.

“But suffice it to say that if next week’s data echoes the robust GDP results, the main message in the April 10 decision and MPR may well be ‘what’s the rush?'”

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With the federal budget just two weeks away, Ottawa could be challenged to meet its most recent deficit estimate of $40 billion, says  BMO chief economist Douglas Porter, who brings us today’s chart.

Revenues are up 3 per cent year to date and program spending is up 6.7 per cent, which is roughly in line with before the pandemic.

However, the “X-factor,” says Porter, is the huge increase in interest charges, which are up more than $20 billion from four years ago.

The economist said these costs will only climb higher over the next year with the addition of more debt and the rollover of low-rate debt.

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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