MNI: BOC Favors Gradual Approach To Rate Cuts, Minutes Show

Bank of Canada officials agree that when they begin lowering interest rates the pace of cuts will be gradual, according to minutes from the last decision published Wednesday that also showed more confidence inflation pressures are normalizing.

"While there was a diversity of views about when conditions would likely warrant cutting the policy rate, they agreed that monetary policy easing would probably be gradual, given risks to the outlook and the slow path for returning inflation to target," the Summary of Deliberations said. "While members were still more concerned about the upside risks to the inflation outlook, they viewed both the upside and downside risks as less acute."

Governor Tiff Macklem held the key lending rate at 5%, the highest since 2001, for a sixth straight decision on April 10, saying he's more confident price stability is returning and a rate cut at the June meeting is within the realm of possibility. Most economists see a June cut but concede waiting until July is possible. (See: MNI INTERVIEW: BOC Rate Cuts Are Justified: Ex Adviser Ambler)

Governing Council members showed optimism about several areas they see as key to figuring out if inflation will durably return to the 2% target, such as companies' price-setting behaviour and the economy's balance of demand and supply. "While members were still more concerned about the upside risks to the inflation outlook, they viewed both the upside and downside risks as less acute."

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Some of the seven-member group wanted "more reassurance" core inflation would continue making progress and others "felt there was a risk of keeping monetary policy more restrictive than needed."

While returning to the idea that lowering rates could rekindle the housing market, this set of minutes didn't repeat concern about the danger of any cut followed by a U-turn. Officials this time noted housing danger exists no matter when they cut and gave more detailed thinking on how inflation is elevated by the jump in mortgage costs following the Bank's 10 rate hikes.

"They agreed that focusing on the Bank’s preferred measures of core inflation allowed them to effectively look through mortgage interest costs" because the "trim" index filtered those out while capturing other service pressures such as rental rates, the minutes said. Some economists argue for quick rate cuts saying inflation has been tamed if mortgage costs are excluded.

Finally, given recent immigration policy changes and how they alters the economy's growth potential and inflation pressures "it would be important to update the population forecast each quarter" the report said.