MNI BOC WATCH: Macklem Cuts 50 And Says More Reductions Needed
The Bank of Canada lowered its policy rate 50bps for the first time since the pandemic slump and said further reductions are likely needed without committing to any particular pace, showing increased confidence prices are stabilizing.
“We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target,” Governor Tiff Macklem said in a statement, and he holds a press conference at 1030am EST. "Now our focus is to maintain low, stable inflation. We need to stick the landing," he said.
The decision removed past Bank remarks about the risk of inflation falling too far, saying recent evidence suggests CPI will quicken to around 2% in October after sliding to 1.6% the month before. The commentary is the closest the Bank has come to declaring a return to normal after a three-year battle to wrestle inflation down from a peak of about 8% during the pandemic rebound.
Inflation has fallen significantly, core indexes are now under 2.5% and price expectations are approaching normal, the Bank said. Economic growth will average 1.75% in the second half of this year the Bank said, less than its July view of something more like 2.4%. The Bank affirmed its view growth for 2024 of 1.2%, with lower rates boosting it to 2.1% next year and 2.3% in 2026. Projected inflation for next year was lowered to 2.2% from 2.4%.
A major risk to the Bank's projection around is how households respond. Slack in the economy is balancing out some inflation hot spots around wages and housing, the Bank said.
Workers continue to see pay hikes of around 5% amid stalled productivity. Those hefty gains come even as record immigration has pulled down per-capita GDP for much of the last two years, what experts have told MNI amounts to a hidden recession. The government has recently moved to slow new arrivals from abroad as unemployment climbs from record lows.
Canada’s stretched housing market has remained tame since the first cut in June, rather than moving into yet another cycle of froth that could make cutting rates harder. Other households face a painful jump in mortgage costs as they refinance five-year loans at rates still reflecting most of the past hikes. Officials had earlier taken borrowing costs to the highest since 2001 at 5%.
The Bank this year was already leading the G7 with three quarter-point cuts that began in June. Since the last decision monetary policy had still become more restrictive -- the overnight rate was 2.1 percentage points higher than inflation in May before the Bank began cutting and the gap before today was 2.6 points.
Confidence inflation will stay on target is a shift from earlier Bank comments it would settle around 2% only sometime across 2025. At the same time, outside of Covid in the era of fixed meeting dates today's jumbo cut has only happened during the global financial crisis and in 2001.
Canada’s key rate of 3.75% is back at 100bps less than the lower end of the Fed’s target range, where it was briefly in September after the Bank cut for a third time. The 100bp gap set this year is the widest since 2007. That so far has led to less CAD weakness and volatility than past cycles.
Fourteen of 20 economists predicted the 50bp cut. Of those six said the Bank would cut another 50 in December. Former officials have told MNI the Bank has scope to keep going to about a neutral rate of 2.75% by the middle of next year.