BoC could leave ‘breadcrumbs’ to pause rate hikes: Desjardins

The Bank of Canada can’t take its foot off the gas just yet, but a new report from Desjardins Securities Inc. said the central bank could start leaving “breadcrumbs” to hint at a possible easing in future interest rate hikes.

“The Bank of Canada is in no position to pivot just yet. Instead, expect policymakers to drop some breadcrumbs about the potential for an earlier pause than markets expect,” said Royce Mendes, managing director and head of macro strategy at Desjardins, in a note to clients Tuesday.

Market data shows the central bank is expected to deliver a supersized three-quarter-point hike at its meeting Wednesday as inflation continues to accelerate.

Mendes called the dearth of communication from the Bank of Canada in recent weeks “deafening” and said that likely means the bank will “do exactly what is priced in.”

“It seems like policymakers were uncomfortable being the leaders of the central bank pack on a jumbo rate hike. But, after seeing the Fed pull off a three-quarter point rate increase without much fallout, the Bank of Canada is primed to follow suit,” he said.

However, Canadian economic data is now starting to show mixed signals.

Two Bank of Canada surveys earlier this month found consumers and businesses expect inflation to run hot for longer than what the central bank anticipated. A record number of responding firms said they expect inflation to remain above three per cent for the next two years.

Meanwhile, interest rate hikes have slowed the real estate market – a key pillar of the Canadian economy – and preliminary data from Statistics Canada estimates the economy contracted 0.2 per cent in May.

Mendes said these could be signs the economy is “turning a corner and might not require much additional tightening,” since changes in monetary policy take time to work their way through the economy.

“The recent weakness is only the tip of the iceberg. It will take time for higher rates to feed through more noticeably to economic activity and for that cooler demand to eventually feed through to lower inflation,” Mendes said.

In its statement this Wednesday, Mendes said the Bank of Canada could begin laying the groundwork to potentially ease up on rate hikes in the future.

“Those breadcrumbs could come in the form of analysis pointing to a softening in the outlook for households or mentions of firms’ order books moderating. Aiding the view that the market is too aggressively priced for rate hikes is the fact that commodity prices, and energy prices in particular, have fallen recently,” he said.

“With fewer exogenous factors driving inflation, there’s a window open to ease off rate hikes before they push the economy into a full-blown recession. That remains our house call. While we have to concede that it’s a narrow window to get through, it’s still a window.”

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