MNI INTERVIEW: BOC Free To Cut At Next Four Meets- Brett House

Canada's central bank has room to keep lowering interest rates at each of its four remaining meetings this year as inflation moves back to target, Columbia University economist and former IMF official Brett House told MNI.

Governor Tiff Macklem's decision to kick off the rate-cutting cycle last Wednesday instead of waiting until the July meeting, along with his remark about of being nowhere near the limit of how far below U.S. borrowing costs he can go, suggest a steady series of cuts, House said. Investors and other economists are split on whether last week's quarter-point cut to 4.75% will be repeated at the July 24 decision. (See: MNI INTERVIEW: BOC Seen Cutting Again In Sept-Conference Board)

“The discussion around gradual that came up both before the meeting and in the commentary around the meeting itself, I don’t think it precludes a cut in July,” said House, also a former senior Scotiabank economist. “There could be gaps but I don’t think there’s anything in his communications so far that indicates a prior that they are going to move at every other meeting.”

Whether the four cuts happen or there is a skipped meeting depends on global inflation shocks and a potential slide in Canada's dollar, House said. “The degree of divergence with the Fed matters, even though it was discounted substantially by the Governor at his press conference,” House said. "This is a real invitation to sell the Canadian dollar. The degree of pass-through is not massive, but it potentially complicates the inflation story a little bit more if you get that Canadian dollar selloff.”

RESTRICTIVE NOTIONS

Canada's currency has weakened steadily over most of the last six months from CAD1.34 to CAD1.38 but there hasn't been much sign of a major drop since the BOC rate cut.

Macklem has been less clear about his view that monetary policy can be less restrictive now while telling reporters that Canadians don't need to pay much attention to the neutral interest rate. “You can’t say that we need less restrictiveness without having a notion of how restrictive we are right now,” House said.

Inflation targeting central banks have long said their job requires figuring out how tight or loose policy is using the neutral rate as a guide, House said. The Bank also boosted its estimate of neutral by a quarter point in April to 2.75%, House noted, which he said adds to the idea borrowing costs aren't going back to lows seen in the past.

Trends around the neutral rate and inflation still point to a more compelling case for rate cuts than the Fed, where officials see signs inflation remains stubborn. Canada's headline inflation is now 2.7% and has stayed within the Bank's 1% to 3% band for several months now, and core measures have also come back within that range. The Bank projects inflation will return to the 2% target next year.

Inflation “is going to gradually ease, but with some bumps,” House said, and that speaks to the idea that looser monetary policy is justified. “There has been no point in the past where we’ve had a 2% real rates without following them with cuts. So there has to be cuts this year.”