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MNI BOC WATCH: Macklem Core Focus To Clash With Rate Cut Hopes

Source: Bank of Canada

BOC Governor Tiff Macklem is likely Wednesday to stick with his view that core inflation remains too hot to justify interest rate cuts as the central bank is set to hold borrowing costs at their highest level since 2001.

Macklem hasn't completely shut the door on a policy shift, saying last month that "we don’t need to wait until inflation is all the way back to the 2% target to consider easing policy, but it does need to be clearly headed to 2%.” The Bank’s October rate decision said it will take until 2025 for inflation to return to target.

All 26 economists surveyed by MNI see the target rate on overnight loans between commercial banks remaining at 5% where it's been since a July increase. The Bank is moving the announcement to 9:45am EST from 10am and the Governor will hold a press conference at 10:30am after each of the year’s eight decisions, with the opening statement released alongside the decision.

Consumer prices quickened in December even with unemployment rising and growth stalling over the second half of last year, while core prices remain around the 3.5% pace officials says is at odds with returning headline inflation to target. That makes it difficult for Macklem to remove his warning he could hike an 11th time, or to strongly embrace the idea officials can start actively debating when to lower interest rates.

It's no longer just current inflation that's a concern but more entrenched expectations, with the Bank's own surveys last Monday showing a majority of firms see CPI topping 3% over the next two years and households continuing to see elevated price gains. Wage bargaining has also become aggressive with inflation running above target for almost three years. (See: MNI INTERVIEW: Aggressive Wage Bargaining To Extend BOC Hold)


Most investors say the next move is a cut, with views varying from April until sometime in the second half of 2024. Many investors bet wrongly last year on a pivot to looser policy as the economy avoided a deep recession and prices were sticky. "There is little impetus for the BoC to flip the script. It will maintain its cautiousness, focusing on how the job isn't done yet," TD’s James Orlando wrote in a research note.

Canada's outlook is also complicated by shocks outside the Bank's control, even beyond global conflicts that could boost commodity prices. Record immigration is changing the economy's potential, the housing market remains one of the world's most overstretched and a federal government seeking re-election next year could add inflationary spending. That could put a lot of force behind Macklem's comment last month that while he may need to be nimble the forecast should be humble. (See: MNI: War, Sticky Prices Dent Canadian Exporter Confidence- EDC)

MNI Ottawa Bureau | +1 613-314-9647 |
MNI Ottawa Bureau | +1 613-314-9647 |

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