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“Survey Reveals: Bay Street Predicts Bank of Canada Governor Macklem Will Cut Rates to Prevent Recession in 2023”
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A poll suggests Macklem may struggle to convince investors that he intends to leave borrowing costs at current levels
Tiff Macklem, Governor of the Bank of Canada, in Ottawa. Photo by Blair Gable/Reuters/File Photo
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Most of the biggest players on Bay Street believe that the Bank of Canada has stopped raising interest rates and that Gov. Tiff Macklem will be forced to cut borrowing costs before the end of the year to avoid a mild recession becomes a heavy one.
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The Bank of Canada released its first quarterly survey of “market participants” on February 6, giving the general public access to the kind of consensus forecast that financial data firms like Bloomberg LP and Thomson Reuters Corp. offer their customers. The central bank will also now have its own benchmark against which to test its own assumptions.
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Usually, the market consensus is the middle estimate of analysts’ forecasts. At the end of 2022, according to the median estimate of 28 of the 30 financial institutions surveyed, the benchmark will remain unchanged at 4.5 percent until July and then rise to four percent by the end of the year.
The market consensus for the fourth quarter on economic growth could give the Bank of Canada pause as it is a bleaker outlook than central bank officials projected in their last quarterly economic report in January. Market participants’ median estimate was that gross domestic product would fall by 0.4 percent in 2023, while the central bank expects growth of 1 percent this year.
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Macklem hiked the benchmark interest rate by a quarter point last month, signaling he is ready to stop doing so if inflation falls further from its June peak of 8.1 percent.
However, the governor insisted that a pause should not be interpreted as a preparation for cuts as inflation remains high. The poll suggests Macklem might struggle to convince investors that he intends to leave borrowing costs at current levels, as most believe economic conditions will force him to lower borrowing costs by the end of the summer to lower.
This is important because inflation could continue. Canada’s output gap — the difference between how much the economy produces and how much the central bank estimates it can produce without fueling inflation — is in surplus, indicating an economy is running beyond capacity and could fuel higher inflation.
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In the survey, around 77 percent of respondents said they would characterize the output gap as “positive,” which could indicate a slower path back to the inflation target. Only around eight percent said the output gap was “negative”.
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Respondents’ median expectations are for headline inflation to fall to 2.9 percent by the end of the year and then slow to 2.2 percent by the end of 2024. Persistently high inflation and a slow return to normal could prompt central banks to freeze interest rates. Benjamin Tal, deputy chief economist at the Canadian Imperial Bank of Commerce, says interest rates are higher than they have been for longer, even as growth slows.
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“Typically, the gap between the last hike and the first cut is relatively short: a few months,” Tal told the Financial Post’s Larysa Harapyn in a Feb. 3 interview. “That won’t be the case this time.” Tal added that central bankers would avoid repeating the mistake of the 1980s, when premature austerity led to a double-dip recession. “If it means keeping interest rates high for longer, then so be it,” he said.
A weaker housing market was cited as the top economic risk, with nearly 78 percent of respondents identifying it as the biggest negative threat to their prospects. For an economy that is largely dependent on its housing sector and has high levels of household debt stemming primarily from mortgages, housing is the oft-cited sore spot among economists when it comes to forecasting economic growth and downturn risks.
It’s not all doom and gloom.
Market participants are expecting a return to growth over the next year, in part because Canadian households still have a large supply of savings. About 67 percent of respondents identified this cushion as a variable that could lead to stronger growth than currently projected. More than half said higher commodity prices could also surprise on the upside.
• Email: [email protected] | Twitter: StephHughes95
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Source: financialpost.com
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