Key interest rate: cuts in spring would be a bit too quick? See an expert’s opinion

Near recession, zero growth in Canada, gloomy economic growth forecasts for 2024: All indicators pointed to the Bank of Canada not raising its key interest rate on Wednesday, but when are the cuts expected?

• Also read: The Bank of Canada decides to take another interest rate break

Even though the increases so far seem to have had their effect, while even consumer spending appears to be at 0%, we still need to remain cautious, according to an expert.

“Ultimately, the labor market will slow, wage pressures will ease and we will see inflation return to 2%,” explains Sébastien McMahon, strategist and senior economist at iA Financial Group.

The expert believes it is “completely reasonable” for interest rates to fall in the second half of 2024.

Cutting the key interest rate too quickly would indicate poor health in the Canadian economy.

Currently, despite stagnant growth, the wage increases planned and demanded by workers suffering from the effects of inflation are contributing to growth.

According to the economist, an increase in the minimum wage of around 5% is expected at the beginning of the year. Public sector union members currently in negotiations expect raises of around 15%.

“It’s tough [avec ces informations] to create a credible scenario in which the Bank of Canada feels comfortable cutting interest rates quickly and massively [en mars-avri]“ explains Mr. McMahon.

Instead, he expects the Bank of Canada to proceed cautiously and could instead begin cutting rates in the second half of 2024, or in the worst case scenario, early 2025.

The Bank of Canada has decided to keep its key interest rate at 5% for the third consecutive day to continue its efforts to combat inflation.

The bank says economic growth in the country stagnated in the second and third quarters of 2023, higher interest rates have “significantly” dampened spending and price pressures have eased.

***Watch his full analysis in the video above.***