MNI BOC WATCH: Macklem Seen Still Looking For Cut Conditions
Governor wants evidence inflation is durably returning to target.
Bank of Canada Governor Tiff Macklem is seen outlining that he wants durable evidence inflation is returning to target before officials can cut borrowing costs in a rate announcement Wednesday, and avoiding a direct commitment to the cut in June many investors predict as headline prices moderate.
The key overnight rate is universally seen remaining at the highest since 2001 at 5% for a sixth meeting in the decision due at 9:45am EST. It comes with a press conference to explain a new quarterly forecast that could ratify both near-term growth momentum and inflation slowing below 3%, and perhaps raise the Bank's estimate of the neutral interest rate.
The focus around the decision is how far Macklem goes in outlining his view that conditions for a cut should emerge later this year and whether he could even indirectly signal a June cut. Macklem has said he wants evidence inflation is sustainably returning back to his 2% target and at the last decision said it was too early for active discussions on lower borrowing costs. (See MNI INTERVIEW: BOC's Macklem Says Can Move Rapidly If Needed)
Inflation continues to slow but upside risks remain in play such as wage growth running around 5% and Bank surveys showing firms and households see price gains remaining elevated. Core measures of CPI also remain above 3% even as headline prices held below that mark for the first time in several years, and economic growth continues to run ahead of the Bank's forecasts even after 10 rate hikes aimed at opening up slack.
CUTS SLOWER THAN HIKES
Signaling a rate cut comes with the risk of re-igniting one of the world's most stretched housing markets and perhaps returning to a mix of too-loose policy with governments running more deficits. That said, every month that headline and core prices ease brings the Bank closer to its view inflation will settle at 2% next year. Macklem has also outlined the risk to the economy of holding policy tight for too long and said that he can cut before inflation returns to target. (See MNI INTERVIEW: BOC Seen Cutting In June As Economy Fades-BDC)
Minutes from the March 6 meeting showed officials agreed their projections suggest rates could decline this year while diverging on the timing. Earlier this year officials also discussed the need to avoid cutting and then being forced into a U-turn. Inflation has been above the Bank’s target for three years now, and officials remain wary of fueling aggressive wage bargaining and corporate price hikes.
Even signaling a June cut is no guarantee rates will tumble this year, as Macklem told reporters after the last decision.
“Everybody would like to see lower inflation and lower interest rates; so would we,” he said. “It’s very safe to say we aren’t going to be lowering rates at the pace we raise them.”