As the Canadian economy has experienced a hotter start to the year than anticipated, TD Economics said it now does not expect interest rate cuts until at least the second quarter of next year.  

Higher levels of economic growth and rapid inflation around the world are pushing interest rates above expectations from the previous quarter, TD Economics said in its Canadian Quarterly Economic Forecast, released Thursday. The report said elevated levels of inflation following the height of the pandemic are “proving harder to tame.” 

“We have pushed back the timing for interest rate cuts until the second quarter of next year, but even this could prove optimistic if core inflation metrics fail to offer convincing evidence of decelerating back to the BoC’s [Bank of Canada] two per cent target,” the report said. 

The report said it is not currently clear what will happen with the economy, given the present risk of a downturn and data that is yet to indicate a recession is occurring. As a result, central banks are attempting to find the “magic number on the policy rate” that will quell inflation. 

The Canadian economy had the strongest growth among all G7 countries during the first quarter of 2023, the report said. A 3.1 per cent gain in real gross domestic product coupled with hotter-than-expected inflation figures in April encouraged the central bank to bring the overnight rate to 4.75 per cent in June, according to TD Economics.

In May, Statistics Canada reported that Canada’s economy grew at a 3.1 per cent annualized rate in the first quarter of the year. In April, the consumer price index rose 4.4 per cent from the previous year, according to Statistics Canada. 

“With our forecast for economic growth being upgraded, we expect the BoC [Bank of Canada] will hike rates again in July to five per cent as it enters this trial-and-error stage of fine tuning the policy rate,” the report said. 

Consumer spending was “quick out of the gates” to start the year, said TD Economics, however, is expected to slow down during the remainder of the year.

Additionally the “hotter start to the year” spurred core inflation figures, which TD Economics said is expected to remain high throughout the year, but headline inflation is projected to slow to three per cent in the short term.  

“The BoC will be focused on the dynamics within core metrics, which proved unexpectedly sticky in April,” the report said.

“With another hike still being contemplated, it would be unusual for a rate-cut to materialize in early 2024 absent a harder landing in the economy.”  

CANADIAN DOLLAR

Following the Bank of Canada’s most recent interest rate hike bringing the nation’s policy rate closer to the one set by the U.S. Federal Reserve, TD Economics said there is “near-term upside” to the Canadian dollar compared to the U.S. dollar. 

“But once the BoC gets the policy rate to five per cent, interest rate differentials will play less of a factor going forward,” the report said.