The Bank of Canada is poised to implement a series of interest rate cuts this year, with the first expected later this month. With the key interest rate currently at 3.25%, the bank aims to ease economic pressures as inflation stabilizes around its 2% target. Economists anticipate that these cuts will occur consecutively five times over the year, reflecting a strategic response to current economic conditions.
Inflation has shown signs of stabilization, with economists expecting fresh data to indicate a further slowdown in December. A Reuters poll suggests that the annual inflation rate for December could average 1.7%, a decrease from November's 1.9% rise. This trend paves the way for the Bank of Canada to continue its strategy of reducing interest rates, which have been adjusted aggressively in recent months.
"While the debate in the U.S. is all about how much inflation tariffs may cause, the only question in Canada is how much growth damage they will inflict," said BMO Chief Economist Doug Porter.
Porter anticipates that, following two significant half-point reductions last year, the central bank will shift to smaller interest rate cuts. Meanwhile, RBC forecasts a decline in the key interest rate to 1.5%, influenced by the federal government's temporary GST tax holiday. This holiday has led consumers to spend less on goods such as food, restaurant meals, and children's toys, impacting overall inflation data.
"We continue to believe that the correct response by the bank to U.S. tariffs would be to cut early, and cut often," Porter added.
Despite the easing inflation, potential tariffs from the United States pose a challenge for future monetary policy decisions. Tariffs are often seen as inflationary for the U.S., with possible repercussions for Canadian inflation rates. TD Senior Economist Leslie Preston predicts that headline inflation might rise above the 2% target by 2025 due to these tariffs.
"The overall backdrop … it’s pretty soft, it has been softening for quite a bit already," remarked Fan, an economist closely monitoring the situation.
Fan also highlighted that the GST holiday beginning on December 14 has potentially distorted December's consumer price index (CPI) data. RBC expects headline CPI to register at 1.8% for December, aligning closely with BMO's projections. However, Porter's analysis suggests there's more uncertainty than usual due to the mid-month tax change.
"The final consumer price index report for 2024 on Tuesday will be closely watched for further signs of easing in underlying price pressures in Canada, but we expect the data will be distorted by the GST holiday," Fan explained.
The Bank of Canada's preferred core inflation rates remained steady at 2.6% and 2.7% in November, underscoring a consistent approach to managing inflation expectations. As shelter costs begin to moderate and mortgage interest gains slow, any impact from the Canadian dollar's depreciation, particularly concerning fresh food prices, will be closely monitored.
"Shelter cost momentum looks to continue ebbing, with slowing gains in mortgage interest costs," noted Porter.
