Economists expect the Bank of Canada’s trend-setting interest rate will remain unchanged on Wednesday, but the central bank’s sentiment will be watched closely for signs of its next moves.

The Bank of Canada will announce its next rate decision on Jan. 24. Economists tracked by Bloomberg expect the central bank will keep its policy rate at five per cent, even after an unexpected increase in December inflation.

A continued rate pause would mark the fourth consecutive hold from the central bank since bringing the policy rate to five per cent in July 2023.  

But even with rates expected to remain steady, Benjamin Tal, deputy chief economist at CIBC Capital Markets, told BNN Bloomberg that the “sentiment of the Bank of Canada” will be key, and markets will be hanging on its every word.

“The market will start looking at what they are saying and listening to what they're saying even more,” Tal said in a television interview.

“The narrative will determine the data and not vice versa. That's extremely important to understand.”

Tal said that the economy is essentially in “recessionary territory” and he expects the central bank will be “very careful” when setting interest rates.

He believes the Bank of Canada is “done” in terms of raising interest rates – and the next question is when they will cut.

“I think the market was a bit optimistic about when the Bank of Canada will be cutting. They were talking about April. I think it would be more June, July,” he said. 

“The Bank of Canada has to make sure that this inflation is absolutely dead before they cut interest rates, even if it means keeping it up for two or three months extra.”  

Inflation in Canada had reached 3.4 per cent as of December 2023, the latest figures available from Statistics Canada. That was down from the high levels that prompted the Bank of Canada to start tightening rates, but still above the central bank’s target rate of two per cent.

James Orlando, senior economist at TD, told BNNBloomberg.ca that he expects the Bank of Canada will indicate belief in “clear progress on the overall economy.” 

In his view, the Bank of Canada will likely push the narrative that although there have been some “positive surges here and there” in economic data, “everything is in place for the downtrend to continue over the coming months.”

“We know that the underlying trend in Canada has been that of weakness,” he said. “The drivers of future inflation are kind of set in place, where you would be confident that things are moving in the right direction.”

However, he added that data doesn’t move “in a linear fashion downward.”

“I think this will keep the Bank of Canada saying things like, ‘The job's not done yet’, or they're going to be cautious. Or they want to be sure that inflation's definitely been broken before it decides to cut interest rates,” Orlando said.

“This sort of cautiousness in the narrative is logical right now because it doesn't have the evidence that the job is done.”

In a Friday report, RBC Economics said the central bank’s upcoming rate decision statement and press conference would be “watched closely for hints” regarding how long the Bank of Canada intends to hold interest rates. 

The economists also predicted the central bank would “push back” against the possibility of interest rate cuts in the near future. 

Inflation

Canada’s consumer price index rose 3.4 per cent in December compared to the previous year, Statistics Canada reported this week, after a 3.1 per cent increase a month earlier.

Canada’s trim and median core inflation averaged 3.65 per cent, higher than the 3.35 per cent economists expected. 

Doug Porter, chief economist at BMO Capital Markets, called the persistence of above-target core inflation “unsettling news."
He expects the Bank of Canada “will doggedly maintain a cautious stance at next week's rate decision.”

Mortgage impact

James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, said with a hold expected, the “tone of the announcement” will impact housing market performance in the beginning of the year.

Any mention of a rate hike from the Bank of Canada will weigh on real estate activity in 2024, he said.

“Anyone with a variable-rate mortgage or home equity line of credit (HELOC) can expect their rate to remain unchanged, but will be reading the Bank’s language closely to see if a rate hike or rate cut is more likely moving forward,” Laird said in a written statement.

 With files from Bloomberg News