MNI BOC WATCH: Macklem Seen Shifting To More Neutral Stance

Bank of Canada Governor Tiff Macklem may nod to further glimmers of easing prices but avoid signaling a fast pivot to rate cuts that could rekindle a housing boom at Wednesday's rate decision, in which the BOC is expected to hold borrowing costs at their highest since 2001 for a fifth meeting.

The benchmark rate is seen staying at 5% by all 25 economists surveyed by MNI, in a decision due at 945am EST followed by a press conference. The vast majority see a cut in June with a few predictions for April or as late as September.

Inflation appears to be moving back to the 2% target but with the kind of mixed results that's led Macklem to stress he can't actively debate rate cuts until it's clear price stability is being restored. Headline price gains just moved back within the Bank of Canada's 1%-3% band and have been above target for three years now, while core indexes remain around 3.5% and wage gains at 5%.

Investors have pushed back forecasts for the first rate 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.

THE BOTTOM IS HOLDING

“The bottom still isn't falling out of the economy in a way that would push the Bank of Canada to shift quickly to looser monetary policy,” RBC economist Nathan Janzen said in a research note.

Canada on Thursday reported GDP grew at a 1% pace in the fourth quarter, and while faster than the Bank's December estimate it suggests slack is emerging in what was an overheated economy.

The last rate decision relegated talk of an 11th hike from the statement to Macklem's press conference remarks and pointed to more evidence policy is working, and he dropped the hiking phrase from his last speech. One key line to watch is any shift from Macklem's Feb. 6 speech in his hometown Montreal: "Governing Council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance."

The Bank may also introduce the idea from the minutes of its last meeting that officials "were particularly concerned about the persistence of inflation and did not want to lower interest rates prematurely, only to have to raise them again to get inflation back to the 2% target." (See: MNI INTERVIEW: Last Thing BOC Wants Is Cut And U-Turn- Stillo)

CORE PRICES MUST SLOW

Core inflation must fade toward 2.5% before the Bank could cut rates, former officials have told MNI. That lines up with the Bank's forecast that CPI won't return to 2% until sometime next year and Macklem's view that he can cut before inflation moves all the way back to target. (See: MNI: BOC Still Needs Patience As Inflation Slows- Ex Staffer)

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 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.

Investors also want clues the Bank is moving to slow its QT pace with some saying overnight markets have shown strain. The deputy in charge of the file has a March 21 speech on the matter where such changes could also be announced.