MNI BOC WATCH: Macklem Set For First G7 Rate Cut This Cycle

The Bank of Canada is seen leading G-7 central banks by cutting interest rates Wednesday, with inflation climbing at its slowest clip in in three years and core rates back within the official target band for the first time since the post-pandemic surge.

Governor Tiff Macklem has held borrowing costs at a 23-year high of 5% for six meetings, and over the last few moved from talking about more tightening to saying the time for easing appears to be close. Fifteen of 21 economists surveyed by MNI see a quarter-point cut at the decision due at 9:45am EST, and most of the rest see Macklem deferring until the July meeting.

Macklem said after the April meeting a June cut is within the realm of possibility and since then headline price gains have faded to 2.7%, a three-year low. Core price indexes have also shown almost unbroken progress over the last four months. Officials are balancing the risk of being tight for too long against the need to be sure inflation gets all the way back to the 2% target. (See: MNI: Transcript of Interview With BOC Governor Tiff Macklem)

The Bank has a single mandate to keep keep inflation in the middle of a 1% to 3% target band and Macklem has said he can cut before inflation returns to target so long as it's clear price stability is being restored. (See: MNI INTERVIEW: BOC Set To Start Cuts In June - Senator Gignac) Officials predict inflation will slow to 2.5% in the second half of this year and return to target sometime in 2025.

POWER TO DIVERGE

While some economists see limits on how far the BOC can diverge from the Fed, Macklem during IMF meetings sat on a stage with Chair Jerome Powell and said he can set policy based on domestic needs. Canada reported Friday that GDP grew at a 1.7% annualized Q1 pace, to average 1.1% since the start of 2023. That lags record population growth fueled by immigration and some private economists say per capita output has been falling over most of the last two years, another contrast with the stronger U.S. cycle. (See: MNI INTERVIEW: BOC To Cut By July, Go Slow- Ex Deputy Beaudry)

There is “a clear case for a first cut” because “inflation progress in Canada is well advanced relative to its DM peers,” Goldman Sachs analysts Joseph Briggs and Giovanni Pierdomenico wrote in a research note.

Outside the Bank's inflation mandate, not all recent data suggest a rate cut is at hand. Employment rose much faster than economists predicted in April with the biggest gain since January 2023, though the jobless rate remained a full percentage point higher than it was a year earlier. With inflation exceeding the Bank’s target for three years now there's also concern about price expectations and wage demands still around 5%.

That's why even if the Bank cuts Wednesday the ultimate path may be much more gradual than the 10 rate hikes made in less than two years including outsized moves of 50 bps and 100bps. Officials and experts have told MNI borrowing costs will also settle at a higher level than in the past given a rising neutral interest rate and continued housing-market froth.