Economists, analysts and commercial real estate investors are anxiously awaiting this week’s Bank of Canada interest-rate policy decision.

The BoC will announce its decision on Wednesday. The central bank has held its key overnight lending rate at 5% for six consecutive periods several periods dating back to July 2023.

“All eyes” are on the BoC as it contemplates a highly anticipated cut or another rate hold, aid James Orlando, a Toronto Dominion Bank director and senior economist, and Brett Saldarelli, an economist with the financial institution, said in a research note that they provided to Connect

“With inflation stabilizing around the 2% target, investors are expecting that the central bank will either cut its policy rate, or at the very least, signal that a cut will happen soon,” wrote the TD economists.

The BoC has projected a softer stance on rate hikes in recent months. Tiff Macklem, the BoC’s governor, said following the last hold that a cut was coming relatively soon.

For a rare time, the BoC’s interest-rate policy is expected to diverge from the U.S. Federal Reserve’s stance.

“While it is clear that the BoC is closing in on its first rate cut, the same cannot be said for the Federal Reserve,” wrote Orlando and Saldarelli.

With Canadian inflation declining towards 2% as the economy sputters, the BoC has left little doubt that cuts are coming. But the Fed has signalled a potential rate hike as U.S. inflation has risen in tandem with strong economic growth.

“The pertinent question is not if the BoC can cut ahead of the Fed, but by how much?” wrote Orlando and Saldarelli. “Historically, a 100-basis-point spread between the Fed and BoC policy rates appears sustainable.” 

Three previous episodes of BoC-Fed rate divergence had “clear macroeconomic justifications,” according to the TD economists. The spreads occurred between 1995-1998, 1999-2000 and 2003-2006. In the first episode, the BoC cut its rate more than the Fed; however, the Canadian central bank lagged behind its U.S. counterpart’s hikes in the latter two periods.

“While we’d understand if the BoC is hesitant to cut given what it is seeing with inflation in the U.S., the Canadian central bank needs to react to what is happening at home,” write Orlando and Saldarelli.

“If [the BoC] believes that it has curbed economic growth enough to ensure inflation is on a sustainable path back to 2%, it should cut rates – even if the Fed doesn’t.” 

Many economists and analysts expect the BoC to wait until July before introducing a cut. However, most Canadians expect the central bank to introduce the long-awaited reduction this month, Dye & Durham reported.

Pictured: Bank of Canada Governor Tiff Macklem

Get Ready for Canada Kick-off

Connect CRE will hold its inaugural Canada Kick-off Event in Toronto on June 11. This will be Connect’s first commercial real estate industry conference in Canada. Panelists will include Syl Apps, managing director and co-country head for Hines; Lindsay Brand, chief investment officer at Concert Properties; Mark Kenney, CEO of Canadian Apartment Properties REIT; and, Marie-France Benoit, Avison Young’s director of Canadian market intelligence. Come and gain insights from industry leaders on such matters as buyer sentiment amid a lower interest-rate environment, cross-border commercial real estate transaction trends, and investors’ outlook for 2024 and beyond. Register today.