MNI BOC WATCH: Macklem Seen Cutting 50 As Inflation Tumbles
MNI (OTTAWA) - The Bank of Canada is expected to lower borrowing costs by half a point next Wednesday as weakening inflation, growth and labor demand steer policymakers' concerns away from sticky wages and housing costs and towards undershooting their target for price growth.
Thirteen of 17 economists surveyed by MNI see the overnight rate declining to 3.75% from 4.25% in a decision due at 945am EST, and five of them predict the stage will be set for another jumbo move in December. Officials had hiked borrowing costs to the highest since 2001 at 5% before three quarter-point reductions that started in June ahead of Canada's G7 peers.
Governor Tiff Macklem said following the last cut in September he could go faster or slower based on the progress of inflation he saw settling around 2% sometime next year.
"With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much," he said after last month's meeting.
GET TO NEUTRAL FAST
Since then, headline inflation has tumbled from 2.5% to 1.6%. While core CPI indexes remain above that mark they are, like the headline rate, advancing at the slowest pace since 2021.
Monetary policy has become more restrictive as a result -- the policy rate was 2.1 percentage points higher than inflation in May before the Bank began cutting and the gap is now 2.6 points. “The BoC should be aiming to get the policy rate into neutral territory as quickly as possible to guard against growing risks of materially undershooting the inflation target,” said Jason Daw, RBC’s head of North America rates strategy.
Economic growth is also coming in at much less than the Bank's third-quarter forecast of a 2.8% annualized pace, and officials have already said what's needed is a period of above-potential growth to keep things in balance. (See: MNI INTERVIEW: BOC 'Hard Discussion' On 50BP Cut- Ex Staffer)
Former officials have told MNI that while the Bank has a single inflation mandate and not the Federal Reserve's dual focus that includes the job market, the steady rise in the unemployment rate over the last year is something the BoC will watch closely. That sentiment has persisted even after the last job report showed a rebound in hiring and a tick down in unemployment. (See: MNI INTERVIEW: BOC Needs Faster Cuts, Labour Congress Says)
WON'T GET FOOLED AGAIN?
At the same time, wage data in Canada suggests the case for sticking with a quarter-point cut can't be entirely dismissed. Workers continue to see pay hikes of around 5% in an economy where productivity has stagnated. 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.
Big bets on what officials will do in tricky moments have also been a set-up for disappointment. Minutes from the last meeting showed Governing Council members themselves were divided on the inflation path. The Bank's decisions also bucked market consensus five times in 2022 and 2023 coming out of the pandemic.
Outside of Covid, the only modern jumbo cuts happened in 2008 and 2009 during the global financial crisis and in 2001 following the 9-11 terrorist attacks. Of course Macklem has overseen an era of mostly extraordinary policy, and has yet to signal an end to QT. At the last decision he signaled multiple rate reductions were a strong baseline possibility.