Will the Bank of Canada cut rates before the Fed?

Economists and analysts anticipate that the Bank of Canada (BoC) could begin easing borrowing costs before the US Federal Reserve.

Analysts warn that not only might Canada ease borrowing costs sooner, but the cuts may need to be deeper than those south of the border, Reuters reported Tuesday.

Concerns over Canada's high household debt-to-income ratio, the highest among G7 countries, suggest that deeper cuts may be necessary to mitigate economic vulnerabilities.

"The Canadian economy has buckled under the pressure of higher interest rates... therefore, they can't match the Fed," said Monex analyst Simon Harvey, who expects a quarter-basis-point cut in June.

Money markets are betting on a 70% probability the Bank of Canada cuts its benchmark rate by a quarter point at the June 5th meeting. Odds of a rate reduction at the April 10th meeting have climbed to 20% following last week's lower-than-expected inflation data.

On the other hand, the Fed is projected to start lowering rates in June.

"Headline and underlying inflation is a bit cooler in Canada, with the low-side surprise in February driving an even bigger wedge," said Douglas Porter, chief economist at BMO Financial Group. "We have long been of the view that the BoC will move ahead of the Fed."

Canada wouldn't be alone in easing monetary policy. Last week, the Swiss National Bank announced a major rate cut, and other countries will likely follow.

For many indebted Canadian households, central bank rate cuts could provide welcome relief from escalating costs, especially with many mortgages up for renewal soon. However, forex analysts cautioned that it might also weaken the Canadian dollar, potentially adding fuel to inflation.

"Canada is seen cutting more aggressively over a longer time frame," said Karl Schamotta, chief market strategist at Corpay.

CMP

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