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When will interest rates come down?

Economists suggest that Canadians may have to wait a bit longer for relief from high interest rates, with the timing of any potential cuts dependent on economic data. The Bank of Canada recently announced its decision to maintain rates at five percent for the fourth consecutive meeting, aligning with expectations.

A noteworthy shift in the central bank's language indicates a move away from debating the restrictiveness of monetary policy to determining how long to maintain the current stance. This shift strongly implies that further rate hikes may be unlikely. However, Governor Tiff Macklem emphasized that the possibility of future rate increases cannot be entirely ruled out.

Despite signals of a more stable outlook, Macklem expressed caution and patience in dealing with inflation. Dawn Desjardins, chief economist at Deloitte Canada, emphasized the bank's cautious and patient approach in taming inflation, acknowledging that achieving the two percent inflation target will take time.

Looking ahead, economists are eyeing the spring as a potential timeframe for the first interest rate cut. Desjardins specifically targets the second quarter, citing the waiting game and patience required as the inflation outlook unfolds.

Ed Devlin, founder of Devlin Capital and senior fellow at the C.D. Howe Institute, aligns with this perspective, anticipating cuts in June and projecting four cuts of 25 basis points for 2024. However, there are differing opinions within the financial community, with some, like David Wolf of Fidelity Investments, expressing skepticism about a June timeline based on past rate pause experiences.

Deputy Bank of Canada Governor Carolyn Rogers addressed concerns about cutting too soon, emphasizing the need for a measured response based on unforeseen circumstances. While predictions vary, it remains uncertain whether the Bank will indeed cut rates, with factors such as economic data and global events playing crucial roles in shaping monetary policy.

The possibility of surprises looms on the horizon, and analysts suggest that Canadians could witness only a marginal drop in rates in 2024 under a soft landing scenario. However, in the event of a deep recession, substantial cuts of up to 300 basis points by year-end may be on the table.

Avery Shenfeld, chief economist of CIBC Capital Markets, found the recent rate hold and Macklem's comments consistent with expectations, interpreting them as a dovish tilt. He maintains his forecast for a first rate cut in June, potentially followed by up to 150 basis points of cuts throughout the year.

Geoff Phipps of Picton Mahoney Asset Management expects cuts of less than 100 basis points for the year, noting a slight decline in market expectations. On the other hand, Brooke Thackray of Horizons ETFs believes that the upcoming GDP data release on Feb. 29 will play a crucial role in determining the trajectory of future rate cuts.

As Canadians eagerly await the resolution of this monetary puzzle, the anticipation of interest rate cuts remains at the forefront of economic discussions, with the Bank of Canada carefully navigating the path ahead.



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