MNI BOC WATCH: Macklem Says Too Soon To Consider A Rate Cut

Bank of Canada Governor Tiff Macklem said it's too soon to consider cutting interest rates with ongoing concern about persistent underlying inflation as he held the target borrowing cost at the highest since 2001 at for a fifth meeting 5% on Wednesday.

“It’s still too early to consider lowering the policy interest rate,” according to the text of Macklem's opening press conference statement. His comments today also only made reference back January's "shifting" discussion about how long to keep restrictive policy rather than saying that discussion had continued this time. The Governor said Wednesday that "there have been no big surprises" since the Jan. 24 decision.

The Bank's rate decision also declined to fully embrace the last inflation report that saw headline prices come back within the 1%-3% target band, dropping the previous references to global and domestic inflation coming back to central bank targets sometime next year. Consumer prices are still seen holding around 3% over the first half of this year and moderating gradually after that in the Bank's projections, which also noted elevated shelter costs and risks from global conflicts. 

"Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour," the rate decision said, an echo of the prior statement. "The Bank remains resolute in its commitment to restoring price stability for Canadians."

Progress on inflation will remain slow and uneven Macklem said the officials want to see sustained progress on core inflation rates that remain above 3% even in an economy showing modest slack. Wages are showing some signs of moderating but remain in the 4% to 5% range they've been in for a while, Macklem said, and overall rate hikes need more time to work.

The decision to hold rates was expected by all 25 economists surveyed by MNI and a majority see the first cut coming in June. Investors in recent weeks pushed back forecasts for the first cut as the job market showed resilience and GDP rebounded. Fed and ECB officials have also signaled they aren't looking at quick cuts amid solid U.S. growth, sticky services prices and global conflicts that could drive up commodity prices.

While Canadian inflation has slowed to 2.9% it's been above the Bank's 2% target for three years now, meaning the dangers of sticky wage and price expectations are in play. The most recent inflation drop was also linked to tax cuts and a drop in energy costs that may not persist, while high-profile grocery inflation remains elevated. 

Dangers of signaling a cut too soon include rekindling Canada's housing market, deemed by the IMF as one of the world's most overstretched. Housing surged last year after the Bank signaled a pause in rate hikes before being pressed back into tightening twice more. Major worker strikes are also a signal that wage demands must be wrestled down, and the government's budget season has started off with big spending that Macklem has said could make his inflation fight harder.

Judging the tightness of Canada’s economy is complicated by the biggest influx of immigrants in decades boosting labor supply and creating more demand. While the unemployment rate has climbed for months from record lows much of that is tied to population growth.

The Bank is also continuing its QT policy of allowing maturing assets to roll off the balance sheet, in a year where it's expected to approach its estimate of what reserves need to stay in system. A deputy is giving a speech on QT later this month, but some investors expected a signal of a change in this decision.