MNI BOC WATCH: Macklem Sees Conditions For Rate Cut Emerging
Bank of Canada Governor Tiff Macklem said he's seeing progress on conditions needed to lower interest rates and needs proof price stability is being restored while holding the key borrowing cost at 5% for a sixth consecutive meeting Wednesday.
"What most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it’s time to cut? The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained," Macklem said in a press conference statement released alongside the rate decision. "The further decline we’ve seen in core inflation is very recent. We need to be assured this is not just a temporary dip."
The Bank lowered its 2024 inflation forecast to 2.6% from 2.8% and said price gains will slow to less than 2.5% in the second half, and affirmed CPI returns to the 2% target next year. Core inflation was again mentioned several times as a key concern amid elevated shelter prices and wages grinding down, even as officials also saw progress there.
"We don’t want to leave monetary policy this restrictive longer than we need to," Macklem said. "But if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we’ve made bringing inflation down."
The Bank also showed more optimism for a soft landing following its 10 rate hikes to the highest borrowing costs since 2001, with officials saying slack that has opened up will disappear as growth improves through 2025 and 2026. "Data since January have increased our confidence that inflation will continue to come down gradually even as economic activity strengthens."
While the decision to hold was universally expected some details were dovish even for investors who already predict the Bank will cut at its next decision on June 5. Macklem's statement removed language about the potential need for tighter policy and a prior comment it was too soon to actively discuss a rate cut. He also toned down a message about a slow and uneven inflation path, saying now that price increases are slowing across most major categories and CPI should slow even with a recent gain in oil prices.
"We’ve come a long way in the fight against inflation, and recent progress is encouraging. We want to see this progress sustained," Macklem said.
The Bank also made revisions to its economic outlook suggesting less scope to slash rates. The estimated nominal neutral interest rate was increased 25bps to 2.75%, and domestic GDP for this year to 1.5% from 0.8%. The Bank's forecast paper said while inflation risks are balanced the upside ones remain more concerning.