MNI INTERVIEW: BOC Justified To Cut 50BPS More In Dec-Kronick
MNI (OTTAWA) - The Bank of Canada has a "compelling case" to follow Wednesday's half-point rate cut with another jumbo move at the next meeting on Dec. 11 according to Jeremy Kronick of C.D. Howe, a think-tank that runs a shadow monetary council and whose membership has included many former top central bankers.
The Bank's 3.75% borrowing rate remains tight relative to inflation at 1.6%, and lowering it to neutral is an urgent task, said Kronick, vice president of economic analysis and strategy at the Toronto-based institute. Inflation has slowed faster than officials expected, unemployment is rising and many households will soon face a painful renewal of five-year mortgages at rates still reflecting the past hikes to the highest since 2001 at 5%, he said.
Governor Tiff Macklem declined to give any detailed path for policy after lowering rates Wednesday, other than to say if the economy progresses as expected, more reductions are coming.
While some inflation hotspots remain in housing and a few services, caution shown earlier this year in starting with quarter-point cuts in June is less needed now, Kronick said.
“There’s probably more to go and if we lived in a world where we could go all the way to where you think you need to be, they might have moved all the way,” this week, Kronick said. The Bank and most economists including Kronick see the neutral rate at around 2.75%, meaning even another 50bp cut would leave policy somewhat restrictive. (See: MNI INTERVIEW: BOC Needs Faster Cuts, Labour Congress Says)
Still, under the system of fixed announcement dates that started in 2000, the Bank hasn’t made multiple jumbo reductions outside of a crisis such as the pandemic slump, the global financial crisis or the 2001 terrorist attacks. The Bank's rate is now also the farthest below the Federal Reserve's equivalent since 2007, though Kronick said that isn't weighing on Canada's dollar like it used to.
THAT MUCH EXTRA
“Thirty years ago we had an economy that was two-thirds goods, one-third services -- there the exchange rate matters a lot. Today we have two-thirds services, one-third goods, and the exchange rate matters but not as much,” he said. Canada's dollar was trading around the weakest since August against the greenback at about CAD1.384 as of mid-morning Thursday.
That gives the Bank a strong hand to remain focused on the single mandate of keeping inflation at 2%, something Macklem said is now well in sight. Getting back to normal after CPI surged to 8% without triggering a recession “is a truly impressive feat,” Kronick said.
“I’m confident that we’re getting back to inflation that’s going to be around two, and so they are going to have to move back to neutral pretty fast,” he said. (See: MNI INTERVIEW: Big CPI Undershoot Unlikely- Ex-BOC Schembri)
Economists polled by MNI since Wednesday's cut are split five-to-five on whether the Bank cuts a quarter or a half point in December.
Another spur to cutting could come after the U.S. election if Donald Trump wins and imposes his promised global tariff wall, Kronick said. That would slow American growth and sideswipe Canada's economy and exports, adding to the burden on household incomes from higher mortgage payments, he said. “If you have a $2,500 a month mortgage are you really ready for an extra $1,250, do we really think people have that much extra?”