By Mumal Rathore
BENGALURU (Reuters) - The Bank of Canada will start cutting interest rates in the second quarter of next year as inflation and the economy slow, according to economists polled by Reuters, who forecast base borrowing costs will drop by at least one percentage point by end-2024.
BoC Governor Tiff Macklem said in a recent speech "interest rates may now be restrictive enough" with excess demand gone and weak growth expected to persist, leading most to conclude the central bank is done hiking.
But Macklem also said "right now, it is not time to start thinking about cutting interest rates."
While the economy was expected to have grown a modest 0.2% annualized rate last quarter after contracting 0.2% in April-June, inflation has come down significantly to 3.1% last month from a peak of 8.1% in June 2022.
All but one of 26 economists in a Reuters poll taken Nov. 27-30 forecast the BoC will now keep its main policy rate on hold at 5.0% until at least end-March, similar to what is expected from the U.S. Federal Reserve.
Only Barclays expects one more 25 basis point rate hike in January. Interest rate futures are pricing the first rate cut in March, earlier than the poll prediction.
"It's readily apparent in the past two quarters, interest rates in the 5% range are a significant headwind to growth, one that is desirable now while the BoC seeks to cool inflation, but too much of a drag to be sustained for a full year ahead," said Avery Shenfeld, chief economist at CIBC Capital Markets.
"Our call does imply a bigger gap between U.S. and Canadian rates, but that's consistent with the evidence at hand that shows the American economy, due to lower household debt levels and locked-in long-term mortgages, is better able to withstand interest rates near 5%."
The poll predicts that the BoC will start cutting interest rates from the second quarter and medians showed it would deliver 100 basis points of rate cuts next year, more than the 75 basis points expected from the Fed.
About 70% of economists, 18 of 26, expected the rate to be at 4.0% or lower by end-2024, much below the expected fed funds rate, in a 4.50-4.75% range.
"The Bank of Canada will be thinking ahead with its policy rate still at 5%...(and) it will basically conclude the hiking cycle has done its job and it needs to start shifting towards a more normal monetary policy setting," said Robert Hogue, assistant chief economist at RBC.
Economists at Desjardins were slightly more pessimistic than others on growth, expecting "a short, shallow recession in the first half of 2024."
"Accompanying labour market weakness should put downward pressure on inflation and prompt the Bank of Canada to cut the policy rate around of the spring of 2024," they wrote.
With nearly 60% of mortgage holders yet to renew their home loans at higher rates, the big question is what do these rate cut expectations mean for the housing market and for those who for years have been eagerly waiting to own a home.
A separate Nov. 15-30 poll of 11 property analysts forecast average home prices, which surged over 50% during the pandemic, to stagnate in 2024 after declining 3.3% this year, compared to a 2024 rise of 2.0% predicted in an August poll.
All but one of nine property market analysts said purchasing affordability next year would improve. But seven of nine respondents said the proportion of home ownership to renters would decrease over the coming five years.
That was despite several government measures announced in the latest Fall Economic Statement to boost housing supply and help lenders dealing with homeowners at risk amid high interest rates.
Sebastian Mintah, an economist at Moody's (NYSE:MCO) Analytics, said the new supply set to come to market will mostly address past shortages, not prepare for the future.
"Given strong demographics are expected to continue, a continued robust pace of new building is needed. Problematically, new supply is likely to come up short as builders turn more cautious."
(For other stories from the Reuters global economic poll:)