Most of the biggest players on Bay Street think the Bank of Canada has stopped raising interest rates, and that governor Tiff Macklem will be compelled to cut borrowing costs before the end of the year to keep a mild recession from turning into a severe one.

The Bank of Canada on Feb. 6 released its first quarterly survey of “market participants,” giving the general public access to the kind of consensus forecast that financial data outfits such as Bloomberg LP and Thomson Reuters Corp. provide their clients. The central bank also will now have a benchmark of its own with which it can test its own assumptions.

By convention, the market consensus is the median estimate of analyst forecasts. At the end of 2022, the median estimate of 28 of the 30 financial institutions in the survey has the benchmark unchanged at 4.5 per cent through July, and then breaking to four per cent by the end of the year.

The fourth-quarter market consensus for economic growth might give the Bank of Canada pause, as it’s a more sombre outlook than the central bank’s staff produced in its latest quarterly report on the economy in January. The median estimate of market participants was that gross domestic product would decline 0.4 per cent in 2023, while the central bank sees growth of one per cent this year.

Macklem raised the benchmark interest rate a quarter point last month and signalled he was prepared to stop if inflation continued to drop from its peak of 8.1 per cent in June.

However, the governor insisted that a pause shouldn’t be interpreted as setting the stage for cuts, as inflation remains elevated. The survey suggests Macklem could struggle to convince investors he intends to leave borrowing costs at current levels, as most think economic conditions will force him to lower borrowing costs by the end of the summer.

That matters because inflation could persist. Canada’s output gap — the difference between how much the economy is producing and how much the central bank estimates it can produce without stoking inflation — is in surplus, pointing to an economy that’s running past capacity and could stoke higher inflation.

In the survey, about 77 per cent of respondents said they would characterize the output gap as “positive,” which could imply a slower path back to the inflation target. Only around eight per cent said the output gap was “negative.”

The median expectations of respondents predicted headline inflation will cool to 2.9 per cent by the end of the year, and then slow to 2.2 per cent by the end of 2024. Stubbornly high inflation and a slow return to normal could persuade central banks to leave interest rates higher for longer than they have in the past, even if growth starts to slow, according to Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce.

“Usually, the gap between the last hike and the first cut is relatively short: a few months,” Tal told the Financial Post’s Larysa Harapyn on a Feb. 3 interview. “This is not going to be the case this time around.” Tal added that central bankers are avoiding repeating the mistake of the 1980’s where premature cuts led to a double-dip recession. “If it means keeping interest rates higher for longer, so be it,” he said.

A weaker housing market was flagged as the biggest economic risk, with nearly 78 per cent of respondents identifying it as the biggest negative threat to their outlooks. For an economy largely dependent on its housing sector and with high household debt loads stemming primarily from mortgages, housing is the often-quoted sore spot among economists when projecting economic growth and downturn risks.

It’s not all doom and gloom.

Market participants see a return to growth next year, in part because Canadian households still have a large stockpile of savings. About 67 per cent of respondents identified that cushion as a variable that could result in stronger growth than currently predict. More than half said higher commodity prices could also generate a positive surprise.

• Email: shughes@postmedia.com | Twitter: StephHughes95