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Posthaste: Risks grow that the Bank of Canada will wait too long to pull the trigger on rate cuts Back to video

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The Bank of Canada runs the risk of depressing an already fragile economy by waiting too long to cut interest rates, says a report from Moody’s Analytics.

Two years after the central bank began raising interest rates to curb soaring inflation, the timing of its next move has become critical, it said.

The Bank of Canada held steady at 5 per cent earlier this month for the fifth meeting in a row, saying core inflation remains a concern and stressing that it was too early to talk about rate cuts.

The Bank’s “still-hawkish tone” quashed speculation of an April cut, but June remains on the table.

The analysis by Moody’s senior economist Brendan LaCerda says the Canadian economy is clearly showing the strain of higher interest rates. Consumers have pulled back on their spending as homeowners renewing mortgages absorb steep payment increases and those who have yet to renew sock away savings.

Mortgage performance remains historically strong but delinquencies have been rising in recent months and charge-off rates on credit cards are back to pre-pandemic levels, the report said.

Businesses too are reducing investment and hiring and the number filing for bankruptcy has started to climb.

“This economic state entails significant risk,” said LaCerda. “The current equilibrium is fragile. Should business sentiment suddenly turn more pessimistic, a swell in layoffs would convince consumers to retrench more severely, quickly sparking a downward spiral into recession.”

So far the labour market has held up, but growing slack will depress wage growth into 2024, removing a key support for consumers, he said. The strong economy in the United States that boosted exports and offset domestic weakness is also expected to slow.

“With these supports fading, the normalization of interest rates is crucial to the maintenance of growth through the latter half of 2024,” said LaCerda.

Getting the timing right is critical. Moving too early risks reigniting inflation pressures, especially in the housing market.

“However, given that the bank has made core inflation a sticking point, the risk of waiting too long has much greater odds than moving too early,” he said.

While Moody’s agrees with the Bank of Canada’s gross domestic product projections for 2024, “there is some distance between” their inflation forecasts.

The central bank’s current forecast of 2.4 per cent inflation by year end would mean only a modest deceleration from the 2.9 per cent pace that started the year, said the report.

“With the bank’s desire to wait and see further confirmation of core inflation’s deceleration, combined with the fact that the reported CPI data are lagged, policymakers risk delaying for too long,” said LaCerda.

It’s a view shared by other economists. David Rosenberg of Rosenberg Research and Ed Devlin of Devlin Capital said Monday on BNN Bloomberg that there is the risk the Bank of Canada will “over tighten” by waiting too long.

Rosenberg argues that the Canadian economy is already in recession, when taking into account its population boom.

“So I think it’s too late in both directions. The bank acted too slow to raise rates. They acted too slow to cut rates,” he said.

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Attacks on vessels in the Red Sea reduced trade through the Suez Canal by 50 per cent in the first two months of this year, according to data from the International Monetary Fund.

The shortest maritime route between Asia and Europe, the Suez normally handles about 15 per cent of all global shipping trade. Now more vessels are diverting around Africa’s Cape of Good Hope, a route that adds 10 days or more to voyages.

And the Red Sea isn’t the only pain point in global trade right now.

Across the world at the Panama Canal, severe drought has forced authorities to limit daily ship crossings since last October. Trade fell 32 per cent at this key chokepoint that normally handles about 5 per cent of global maritime trade.

• Investors will be focused on the United States Consumer Price Index today for clues on the Federal Reserve’s next rate move. However, the pundits expect only minor cooling in the February data which would underline the message that the Fed is in no rush to cut.
• Quebec provincial budget
• Earnings: Wesdome Gold Mines Ltd, Labrador Iron Ore Royalty Corp, Transcontinental Inc

• Chinese-made cranes used at Canadian ports flagged as security concern by U.S.
• Stock markets are soaring, but there is a case to be made for alternatives
• What will your income be in retirement? The answer goes well beyond investment returns

Canadian investors often moan about the homegrown stock market’s lack of growth (ahem), but that’s because it’s more tilted toward cyclical stocks while the S&P 500 is growth oriented. Market strategist Bhawana Chhabra dives deeper into the differences to find out where investors may want to put their money at home. Find out more at FP Investing

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at aholloway@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers led by Julie Cazzin or one of our columnists can give it a shot.

McLister on Mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Mortgage performance

Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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