Bank of Canada's policy pirouette not yet complete

Canadian economic trends have been mixed, but softer on balance. GDP shrank in Q3 but appears to have rebounded in Q4. Still, given a softening labor market, modest growth in household income and rising interest rates, and a subdued outlook for business and investment spending, we expect Canadian GDP growth to slow moderately to 0.9% in 2024.

With the economy downshifting to a lower gear, the Bank of Canada shifted focus at their January monetary policy announcement. The central bank held rates steady and, acknowledging slower growth and some improvement in inflation, said it has shifted from discussing whether the policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level.

The Bank of Canada received encouraging news from the January CPI, which showed both core and headline inflation slowing more than expected. However, some measures of services inflation remain elevated, while the three-month annualized change of the core CPI is still some way above the 2% inflation target.

We still think it is too early for the central bank to cut rates just yet. While an April move is potentially in play if growth softens further and inflation slows further, we still view June as the more likely timing for an initial 25 bps rate cut. More broadly, we forecast a cumulative 100 bps of rate cuts this year, which would see the policy rate finish 2024 at 4.00%.

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