MNI BOC WATCH: Third Cut Expected; Macklem Seen Signaling More

MNI (OTTAWA) - Canada's central bank will lower interest rates for a third consecutive meeting on Wednesday and likely signal more relief is coming as inflation moves back to target and the economy lags policymakers' third-quarter forecasts.

The overnight rate is seen falling another quarter point to 4.25% in a decision due 9:45am EST, according to all 22 economists surveyed by MNI. 

Governor Tiff Macklem said at the last decision more cuts can be justified if inflation keeps cooperating. Since then, the CPI has slowed to a three-year low of 2.5%, employment stalled out for a second month and a flash estimate showed GDP growth was flat to start the third quarter. Federal Reserve Chair Jerome Powell has also signaled he's prepared to cut for the first time later this month and other central banks are removing tight monetary policy that subdued the post-pandemic burst of inflation. 

While BOC officials had confidence to cut twice already and ahead of G7 peers, their forecast for inflation settling back at the 2% target was vague, saying that would happen sometime in 2025. Lingering upside concerns around wages and housing prices has many investors looking for whether Macklem keeps signaling multiple modest 25bp rate cuts rather than give in to outside calls for a jumbo reduction. (See: MNI INTERVIEW: BOC Has Scope To Cut To Neutral- BDC's Cleroux) 

But if third-quarter growth fell well short of the Bank's 2.8% projection, economists saw little scope for a more aggressive easing path. 

CEMENTING THE EASING CASE

Former officials have told MNI the Bank has scope to cut a quarter point at each of its three remaining meetings this year, and over time to somewhere around a neutral rate of 2.75%. The central bank's own survey of investors taken between the June and July cuts saw rates falling to 3% by the third quarter of next year.

"The last six weeks have given the Bank more evidence of moderating inflation pressures as the economy moves further into excess supply, cementing the case for easing, and we look for the statement to retain the dovish tone from July with no change to guidance," TD Securities strategists said in a note. 

The Bank can take some confidence in easing policy from the fact that second-quarter GDP also showed clear weakness in consumer spending and housing. Resale home sales are showing little new froth since rate cuts began, unlike an unwelcome spell last year.

While the Bank has a single inflation target, investors have also said the rise in the jobless rate from near record lows can be another reason to keep moving borrowing costs down. Consumers are also facing a painful jump in mortgage costs as they refinance at rates still reflecting most of the hikes from near zero to 5%. 

OPPOSING FORCES

Even with second-quarter growth of 2.1%, record immigration means per capita output fell for a fifth straight quarter, which economists say is masking recession-like conditions. (See: MNI INTERVIEW: BOC To Keep Cutting As Far As 3%- Ex Staffer)

Macklem told reporters after the July decision that the balance of risks has shifted to include the potential that inflation undershoots the target. 

"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," he said.

With inflation above target for more than three years, a pause in rate cuts at some point is hard to rule out. The Bank expects core inflation will slow to around 2.5% in the second half of this year and headline prices may show some bumps on the way back to target.