Economic commertary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The Bank of Canada cut its policy rate to 4.75% and will continue quantitative tightening (QT), in line with our expectations.
The key message in today’s decision is that, with underlying inflation easing and its momentum being in line with the inflation target, monetary policy no longer needs to be as restrictive as it was. However, the language continues to suggest the BoC will remain focus on any signs that progress on inflation could stall.
As we have been saying for some time, the BoC remains focus on the momentum in its measures of core inflation and the breadth of the inflationary pressures. With this in mind, this means that as long as the momentum in core inflation remain below 2.5% and the share of components rising by more than 3% does not increase, the door will be open for a rate cut, in our view.
Overall, the decision today was in line with our expectations. The language suggests that, as long as inflation continues to moderate and remains consistent with the inflation target, especially the momentum in measure of core in our view, further easing in monetary policy is likely. This means that we should not dismiss the possibility that the BoC could cut again in July, subject to inflation continuing to inflation evolving in line with the conditions identified above.
The focus should also be on what the terminal rate in the easing cycle will be. As we have said repeatedly (see What happened to the recession? The role of the policy stance and demographics), the neutral rate is higher than pre-pandemic. This means that the extent of the rate cuts could be limited, meaning that interest rates a year from now are likely to be higher than pre-pandemic for a long period.
The BoC cuts its policy rate by 25bp to 4.75%, as we expected. It also said that it will continue its quantitative tightening policy. In its statement, the BoC notes that “with continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive”. However, the BoC also added that “risks to the inflation outlook remain” and that it is “closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”
The BoC also continue to make it clear that it “remains resolute in its commitment to restoring price stability for Canadians,” suggesting that it stands ready to act if inflationary pressures do not ease and remain stubbornly sticky.
On balance, the BoC signaled that more cuts should be expected, if inflation continues to moderate, with Governor Macklem saying in its Opening Statement that “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate” and that “we don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target.”
The BoC sees “The global economy grew by about 3% in the first quarter of 2024, broadly in line with the Bank’s April Monetary Policy Report (MPR) projection”. The US economy continues to expand but at a slower pace, as expected. On the flip side, growth improved in the Euro area, while the Chinese economy was stronger than expected. “Inflation in most advanced economies continues to ease, although progress towards price stability is bumpy and is proceeding at different speeds across regions”. This will be something the BoC will watch closely to see if there are any learning for Canada.
In the Canadian economy, the BoC notes that ”economic growth resumed in the first quarter of 2024 after stalling in the second half of last year. The BoC sees the economy operating in excess supply, as evidence by a rising unemployment rate. Wage growth remains elevated but seems to be moderating gradually.
The BoC notes that “CPI inflation eased further in April, to 2.7%. The Bank’s preferred measures of core inflation also slowed and three-month measures suggest continued downward momentum”. However, the BoC also acknowledge that shelter costs continue to be high. The central bank also notes that the breadth of inflation in now closer to its historical average.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.