Bank of Canada readies for its 1st rate decision of 2024. Here’s what to know!

The Bank of Canada is gearing up for its first interest rate decision of the year, with economists emphasizing the challenges in the "last mile" of the inflation fight as a crucial hurdle before considering rate cuts. Despite a significant drop in inflation from the summer highs of 8.1% in 2022, the rate has plateaued at around three to four percent over the past six months.

BMO chief economist Doug Porter highlights the stubbornness in core inflation, particularly in services and shelter costs, as a concern for the central bank. While the initial inflation was driven by supply chain bottlenecks, which have eased, current inflationary pressures are linked to increased demand for services and rising housing costs.

James Orlando of TD Bank notes that tackling shelter inflation, particularly in the rental market, is complex and lacks a quick fix. The slow pace of addressing housing deficits makes the last mile of inflation harder to navigate.

The Bank of Canada is expected to maintain its benchmark interest rate, with the focus shifting to when it should transition from tightening to stimulating the economy. Economists suggest that consumer spending trends, which have been flat and are expected to weaken further with upcoming mortgage renewals in 2024, will play a pivotal role in this decision.

RBC economists believe that inflation and sustained wage growth make early interest rate cuts unlikely, and the Bank of Canada is expected to resist calls for a shift to rate cuts in the near term. Orlando anticipates interest rate cuts to begin in mid-2024, but there are uncertainties, such as risks from global supply chain disruptions.

Geopolitical tensions and supply chain disruptions pose risks to the inflation outlook. While some forecasters expect easing to start in the spring, Orlando emphasizes that unforeseen developments in global supply chains could alter this timeline.

Ultimately, the decision on interest rates will depend on how the Canadian economy performs. If the economy accelerates, the timeline for rate cuts may be pushed back, but a sharper slowdown could expedite the process. Orlando underscores the importance of monitoring the labor market, as any signs of job losses could significantly impact consumer confidence and, consequently, the overall economy.