The Bank of Canada’s next move is clearly a cut, TD says

Is the Bank of Canada done raising interest rates? Yes, says TD.

In a research report December 6, TD Senior Economist James Orlando talked about interest rates following the BOC’s move to hold steady on that day.

In a December 7 speech to the ​​Windsor-Essex Regional Chamber of Commerce, Bank of Canada deputy governor Toni Gravelle said it is walking a bit of a tightrope when it comes to interest rates.

“We don’t want to slow the economy too much, but we also don’t want Canadians to continue living with the pain of high inflation,” he said. “While we saw some welcome improvement in inflation measures in October, we must remember it’s just one month. We need to see further progress.”

The analyst says it was simply not a tough decision.

“A hold today was the only option for the BoC,” Orlando argued. “Given the economic backdrop, the BoC has likely gained greater confidence that its policy stance is sufficiently restrictive. There has been obvious weakness emanating from the housing market for a while now, but more recently, consumer spending has slowed alongside a further cooling in the labour market. But with inflation still above 3%, we get why the BoC isn’t ready to declare victory. Instead, the BoC seems like it is preparing to sit on the sidelines for the next couple of months while maintaining its cautious rhetoric.”

But further on in his December 7 speech, Gravelle did open the door to another potential raise.

“Given the risks to the inflation outlook, we remain prepared to increase the policy rate further if needed,” he said. Orlando warns that there is a degree of uncertainty, even if the economist is convinced about what will happen in April.

“Markets don’t think the BoC will be able to get too comfortable. The next move is clearly a cut, with odds pointing to the first move in April. We agree. The next few months are going to be challenging given our expectation that the unemployment rate will continue to rise, which will hit consumer spending and bring inflation down along with it. No wonder the Canada 2- and 10-year yields have fallen approximately 90 basis points over the last two months,” he concluded.