MNI BOC WATCH: Cut Leads G7 And Macklem Sees More Slow Moves

Bank of Canada Governor Tiff Macklem lowered the key lending rate for the first time in four years on Wednesday, moving ahead of G7 peers and saying measured further cuts are likely needed amid growing confidence that restrictive policy is returning inflation to target.

The rate was lowered after six meetings at the highest since 2001 by a quarter point to 4.75%, as expected by a majority of economists, though a group felt the Bank would wait until July to avoid a drop in the Canadian dollar associated with moving before the Fed. It's the first rate cut since borrowing costs were near zero during the pandemic and two years after inflation then jumped to about 8%. 

"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. But we are taking our interest rate decisions one meeting at a time," Macklem said in the opening statement of a press conference due at 1030am EST.

Macklem devoted a chunk of his remarks to listing off evidence that inflation is returning to normal, noting the share of the CPI basket showing extraordinary gains has returned back to near the historical average. Headline inflation has been within the Bank's 1% to 3% target band over the last four months while core indexes have shown almost unbroken progress, and the Bank also noted inflation continues to ease across major economies.

"With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive," the Bank said. "Recent data has increased our confidence that inflation will continue to move towards the 2% target." The Bank in April said inflation will slow to 2.5% in the second half of this year and back to target sometime in 2025. Inflation is now at a three-year low of 2.7%. 

Canada's economy continues to show slack suggesting "there is room for growth even as inflation continues to recede" the Bank said. There are still upside risks such as geopolitical turmoil, another surge in home prices and wage growth remaining high relative to productivity, Macklem's statement said.

While some economists see limits on how far the BOC can diverge from the Fed, Macklem during IMF meetings sat on a stage with Chair Jerome Powell and said he can set policy based on domestic needs. Macklem's statement Wednesday made no mention of the Fed or the Canadian dollar. The ultimate reduction may be more gradual than the 10 hikes made in less than two years including moves of 50 bps and 100bps. Officials and experts have told MNI borrowing costs will also settle at a higher level than in the past given a rising neutral interest rate and continued housing risks.