The Bank of Canada (BoC) will not offer any predictions about future rate cuts, for fear that investors and consumers will take any such talk as a green light to ramp up spending and work against the goal of reducing inflation.

But that being said, here is our argument for why you might reasonably expect the BoC will start easing its Policy rate over the second half of 2024.

Let’s start with the S&P Global Canada Services PMI report published today that shows the Canadian service sector shrank in December, the seventh monthly contraction in a row and is hovering at a three-and-a-half year low. Yes, that’s right, the service sector is suffering now more than it has at any point since the initial COVID global shutdown of spring 2020 and the employers are beginning to report job losses as a result of diminishing demand.

Add to that the S&P GLobal Canada Manufacturing PMI report published on Tuesday which shows that the manufacturing sector shrank in December for the ninth consecutive month and that job losses are coming.

With layoffs coming in both services and manufacturing, unemployment numbers will begin to rise and wage growth is going to stall out.

Next, factor in that Canada is planning to bring in almost 1.5 million immigrants over the next 3 years. These new Canadians will be vital to the long-term prosperity of our economy as we struggle to fill many skilled jobs that have already or will soon become vacant due to demographic trends (boomers retiring, leaving their skilled jobs vacant and simultaneously increasing demand for more healthcare and quality-of-life services). However, in the very short term of the next 12-24 months they will be coming into a shrinking economy and looking for work at a time when businesses are downsizing their workforces. This increase in the supply of labour will further suppress wage growth and temporarily lead to higher reported unemployment numbers.

Last but not least, remember the coming wave of fixed-rate mortgage holders who have so far been sheltered from the impact of 2023’s rapid rate hikes, but will now have to renew at today’s rates and experience a huge increase in their monthly mortgage payment. This will redirect billions of dollars of household spending away from purchasing goods and services, with the money instead going to pay the monthly mortgage interest.

Services and manufacturing sector demand already shrinking + layoffs + increased labour supply + reduced consumer spending from higher borrowing costs = economic recession and falling inflation.

As these forces play out over the first quarter of 2024 the BoC will get the breathing room it needs to begin contemplating loosening the purse strings, and by the second quarter it would have enough trailing data to justify a tentative quarter point cut to the policy rate.

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