MNI BOC WATCH: Second Cut, More Can Be Justified As CPI Eases

Bank of Canada Governor Tiff Macklem cut interest rates for the second consecutive meeting Wednesday and said more moves can be justified as inflation risks become balanced between sticky housing and services prices and economic slack holding down the cost of other products.

"If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces playing out. In other words, we will be taking our monetary policy decisions one at a time," Macklem said in a statement for a press conference due around 10:30am EST.

The decision continues the shift from restrictive policy aimed at clamping down on upside risks to more confidence CPI will settle around the 2% target next year. Macklem expects core inflation will slow to around 2.5% in the second half of this year and noted the overall breadth of price increases in the inflation basket is now near historical averages. References were made to the prospect of undershooting of the inflation target perhaps because of a drop in household spending or a one-off decline in gasoline prices.

"With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations," Macklem said. "We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2% target."

Headline inflation may fade below core prices in the second half of this year and then "edge up again" before settling on target, the Bank said. "Opposing forces" around inflation suggest progress will "likely be uneven," Macklem said. The Bank's new quarterly economic forecast showed inflation averaging 2.0% over the fourth quarter of next year, down a notch from the prior report. 

"As inflation gets closer to the 2% target, the risk that inflation comes in higher than expected has to be increasingly balanced against the risk that the economy and inflation could be weaker than expected," Macklem said. Even the wage growth that by some measures is still running faster than 5% was seen by Macklem as moderating, and officials said Canada's dollar has been stable at a time investors say it could tumble amid further divergence from the Federal Reserve. 

This year's growth forecast was lowered to 1.2% from 1.5% and a pickup is expected to 2.1% next year and 2.4% in 2026. Officials say that's compatible with slowing inflation because of slack that's emerged in output and labor markets.

Canada's policy rate remains tight compared to headline inflation of 2.7% and consumers remain vulnerable to mortgage resets incorporating most of the shock of past hikes from 0.25% to 5%. Twenty of 23 economists surveyed by MNI predicted today's quarter-point cut, with many saying action was needed with record immigration driving up unemployment by more than a percentage point over the past year and masking a decline in per-capita output.