Bank Of Canada Begins Easing Monetary Policy

Last week, the Bank of Canada (BoC) began its monetary easing cycle with a widely expected 25bp cut in the policy rate to 4.75%. The accompanying statement was generally mild in tone, with the central bank saying it was reasonable to expect further rate cuts over time.

The latest data point to relatively solid economic and employment growth in early 2024, with inflationary pressures continuing to recede. The BoC itself has acknowledged that while inflation continues to retreat, there is still room for growth. As a result, we expect the BoC to cut its policy rate by 25bp in its July statement, while our base case also sees 25bp cuts in September and October, which would take the BoC’s policy rate to 4.00% by the end of 2024.

Risks to the BoC’s medium- to long-term policy outlook are tilted toward a more gradual pace of easing. If Canadian economic activity remains unexpectedly resilient and the favorable inflation trend is interrupted, there is a chance that the BoC could pause again at its September or October meeting. There remains the possibility that the Fed’s easing could be further delayed, which, if it happens, could be another reason for the BoC to be more cautious in cutting its own policy rate.

Last week, the Bank of Canada (BoC) initiated a rate-cutting cycle, cutting its policy rate by 25 basis points to 4.75%, a move that was widely expected. In addition to the rate cut, the accompanying statement was generally dovish. The BoC said:

GDP growth in the first quarter was lower than expected, despite solid consumption growth.

Employment continued to increase, but job gains continued to lag behind growth in the working-age population. Wage pressures remain but appear to be easing.

Overall, “recent data suggest that the economy is still operating with excess supply.”

The central bank also noted the slower pace and smaller magnitude of price increases and concluded that “monetary policy no longer needs to be as tight,” adding that recent data have increased policymakers’ confidence that inflation will continue to move toward their 2% target.

Separately, in a post-meeting press conference, BoC Governor Macklem said that if “inflation continues to ease and our confidence in the continued progress of inflation toward our 2% target continues to increase, then it would be reasonable to expect further cuts in the policy rate.” But we make rate decisions at one meeting at a time. He also said that while inflation continues to decline, there is still room for it to grow.

Finally, when asked how much lower Canada’s policy rate could go than in the United States (to the extent that this would lead to a weaker Canadian dollar and thus local inflationary pressures), Governor Macklem said: “I don’t think we’re anywhere near that limit yet. In our view, the Bank of Canada is clearly willing to cut rates further, and the key question is how fast.

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