In the months since the Bank of Canada (BoC) last hiked its overnight interest rate back in October, most economists have expressed the fairly unanimous prediction that the central bank would not move the rate again — in either direction — through the end of 2020. That consensus ruptured this week, however, as one of the country’s biggest banks shifted its rate expectation to an outright cut.
The Canadian Imperial Bank of Commerce (CIBC) now expects the BoC to cut its overnight interest rate to 1.5% down from the current 1.75%, although CIBC believes any cut from the central bank will come “reluctantly.” CIBC’s senior economist, Royce Mendes, and the bank’s head of North American rates strategy, Ian Pollick, predict that the cut will come in the second quarter of 2020.
This makes CIBC the first major bank to predict a rate cut, although the U.S. Federal Reserve is also expecting the BoC to slash its overnight rate. With the exception of National Bank, which forecasts two rate hikes in the second quarter of 2020, the rest of Canada’s major banks are maintaining their stance that the BoC will not make any changes to its overnight rate until 2021.
“We’ve long been in the camp that Canadian central bankers were done with rate hikes, but now see it likely that a widening output gap in 2020 will force the bank's hand to stay true to its inflation target,” said Mendes and Pollick.
Another reason they expect cuts from the BoC is because the U.S. central bank is likely to cut its 2.5% target for the Fed funds rate both at the end of this year, and in early 2020.
“While the Bank of Canada isn’t intrinsically tied to Fed policy, soft global growth means there’s even less reason to believe exports and associated business investment will be able to make up for slowdowns in other parts of the economy,” they wrote.
Although the explicitness of CIBC’s prediction is new, it is not entirely surprising. For months, economists have considered the possibility of a nation-wide recession as the BoC progressively shifted the tone of its rate announcements to rule out the possibility of any rate hikes in the near future. Generally speaking, when the national economy is going strong, the BoC raises rates to curb reckless spending. When the economy is weak, the bank cuts rates to encourage spending.