MNI: BOC Sees More Rate Cuts If Economy Evolves As Expected

Bank of Canada Deputy Governor Rhys Mendes on Tuesday affirmed more interest-rate cuts can be expected if the economy advances in line with forecasts, and while the latest headline inflation reading met that condition there are important GDP and jobs data due ahead of the Dec 11 decision. 

"If the economy evolves broadly in line with our forecast, then it’s reasonable to expect further cuts to our policy rate. That said, the timing and pace of further cuts will be guided by incoming information and our assessment of its implications for the inflation outlook," Mendes said in the text of a speech in Charlottetown, Prince Edward Island. The remarks made no reference to U.S. President-elect Donald Trump's remark last night that he will impose a 25% tariff on Canada upon taking office, which could hit about three-quarters of Canadian exports.

The economy no longer needs policy to be so restrictive, which is why the Bank stepped up in October with a 50bp cut to 3.75% after three prior quarter-point reductions, Mendes said. Investors have been divided since then on whether the Bank will bring another jumbo move next month or return to a quarter-point, but Mendes didn't weigh in on that debate. 

Most of his speech looked at the Bank's rate hikes from near zero to the highest since 2001 at 5% during the pandemic rebound. Comparing that cycle to the 1970s, Mendes noted Canadian inflation peaked at around 8% and came down quickly versus the past experience of a decade where inflation averaged 10%. Canadian and other central banks this time acted decisively to prevent a spiral of elevated long-run inflation expectations, he argued.

Still, in this more recent cycle the Bank's own business survey showed a large majority of managers at some points expected inflation faster than the top of the 1% to 3% target band over a two-year period. The speech also presented a chart showing that household expectations for inflation five years ahead never exceeded 4% through the pandemic even as core CPI climbed above 5%. Five-year consumer expectations remain around 3% now.

The central bank is due to publish a review of its strategy early next year. "We did what we believed was necessary to restore price stability," Mendes said. "And it worked: inflation has returned to 2%, and interest rates have started to come down. But it hasn’t been painless."

Conservative Leader Pierre Poilievre, well ahead in polls ahead of an election due by next fall, has said he will fire Governor Tiff Macklem for pain caused by inflation and has equated the Bank's balance-sheet policies with financing reckless budget deficits.