Bank of Canada holds key rate, but signals June cut in ‘realm of possibilities’
Economist believes it will take a series of rate cuts before many are ready to take the plunge
The Bank of Canada held its benchmark interest rate steady on Wednesday amid signs that inflation is easing, with officials acknowledging that a rate cut in June is “within the realm of possibilities.”
The central bank’s policy rate, which informs lending rates on key products like Canadian mortgages, remains at 5.0 per cent for the sixth straight decision.
The hold was widely expected by economists amid signs price pressures are easing, growth in the economy has stalled and the once-tight labour market is softening. Bank of Canada governor Tiff Macklem said Wednesday that recent data has given the central bank more confidence that “inflation will continue to come down gradually even as economic activity strengthens.”
Tu Nguyen, economist with RSM Canada, told Global News on Wednesday that the Bank of Canada’s statements on Wednesday were “more dovish” – implying that less restrictive monetary policy could be on the way. “The Bank has definitely changed its stance,” she said. “Even though the rate was held at five per cent, I think the focus now has shifted … and the door is open for rate cuts.” Macklem also told reporters that the Bank of Canada’s governing council discussed when it would be appropriate to lower its policy rate. While he said there was some “diversity of views” among the council, there was a “consensus” to hold the policy rate at 5.0 per cent on Wednesday.
Macklem said that while the Bank of Canada is “encouraged” by its progress to date, policymakers need to be certain the recent easing in core inflation is not a “temporary dip.”
“The moment the rate cuts begin, that is a signal for businesses to begin investing and hiring again. And we don’t want Canadian businesses to to fall behind compared to global peers,” Nguyen said.
Benjamin Reitzes, BMO’s director of Canadian rates and macro strategist, said in a note to clients Wednesday that there are limits to how far the two central banks can diverge. The Bank of Canada will want to be “a bit more cautious” on its rate cut timing if it appears American monetary policy will be on hold for longer than previous thought.
“The last thing the (Bank of Canada) wants is to cut too aggressively, have the loonie tank, and spark imported inflation,” Reitzes said.
Macklem acknowledged Wednesday that “developments in the United States have an impact in Canada.” But he pushed back as he has previously on assertions that the Bank of Canada would take its cue from the Federal Reserve on when to cut rates.
“We’re focused on where we think inflation in Canada is heading,” he said. Shelter price inflation also remains “very elevated,” the Bank noted, thanks to rising rents and mortgage costs. Food price inflation is expected to continue to cool thanks to global price declines in the agricultural sector, according to the MPR.
Government spending is also contributing more to economic growth than in January’s forecast, the central bank said. That’s based largely on updated provincial budgets released in recent weeks, with Ottawa’s spending plans set for release next week.
Monetary policymakers will continue to watch the evolution of inflation expectations, corporate pricing behaviour and wage growth as it decides where to take its benchmark interest rate next.
The central bank noted that recent easing in the labour market suggests wage pressures are “moderating.” The Bank’s MPR said it expected further progress in inflation expectations and normalized pricing in the months ahead.
But rising home prices tied to strong demand in the housing market and outstanding geopolitical risks still threaten to push inflation higher in the months ahead, the report warned.
Carolyn Rogers, senior deputy governor at the Bank of Canada, told reporters Wednesday that the Bank does expect “some pickup” in home values this year, but a rally that sees prices accelerate past the central bank’s forecasts could put “pressure” on inflation.
“It’s one of the risks. It’s not the only one,” she said.
Sourced from Global News