MNI INTERVIEW: BOC On Track For June Cut- Ex Researcher
Trend inflation continues to improve as policymakers want, Charles St-Arnaud says.
The Bank of Canada remains on track to lower interest rates in June even after this week's inflation bump and a federal budget with more deficit spending because underlying prices are cooling as Governor Tiff Macklem wants, former central bank economist Charles St-Arnaud told MNI.
Statistics Canada’s report showing inflation ticked up a notch to 2.9% in March contains encouraging details such as slower core prices and a greater share of the CPI basket moving back to target, St-Arnaud said in an interview. Last week’s hot U.S. inflation report also won’t limit Governor Tiff Macklem from moving in the short term, he said.
Core prices now average less than 3%, marking the top of the Bank's 1% to 3% target band, and the share of the CPI basket with elevated prices is returning to the historical average, St-Arnaud said. Officials know at this point their 5% overnight borrowing rate is restoring normal pricing, he said.
“It’s very likely that the Bank of Canada will be able to move in June. It’s clear that the Bank of Canada understands that 5% is restrictive,” said the former BOC and finance department economist who’s now chief economist at the Alberta Central credit union. (See MNI INTERVIEW: BOC Rate Cuts Are Justified: Ex Adviser Ambler)
LOTS OF INDEPENDENCE
His view differs from those of some economists who have moved back cut forecasts to July, citing a Federal Reserve that went from penciling three cuts this year to a point where some officials say rates may remain frozen. Waiting another six weeks to July to cut isn't impossible but St-Arnaud said Macklem won't wait for Chair Jerome Powell.
“The Bank of Canada can do a lot independently before creating any issues,” St-Arnaud said. “If inflation continues to surprise in the U.S. and not in Canada, the Bank of Canada will do what matters for Canadians.” Headline inflation has been below 3% for three months and core prices have shown several months of improvement, contrasting with stronger-than-expected U.S. prints.
“If inflation continues to be sticky in the U.S., the U.S. yield curve might actually stay sticky and maybe increase, that will spillover impact on our own rates,” St-Arnaud said. The Bank “may actually feel compelled to cut rates to compensate that tighter longer end of the curve.”
While Tuesday's federal budget could have been tighter Finance Minister Chrystia Freeland also met her deficit cap and it's possible the shortfall narrows thanks to a stronger-than-expected economy, he said.
Historical arguments about a drop in Canada's dollar after a BOC rate cut have faded and it would take a depreciation of 10% to 20% or a sudden plunge for Macklem to consider mirroring U.S. caution, St-Arnaud said. It seems just as likely the Canadian dollar strengthens alongside higher prices for energy exports, he said. (See MNI INTERVIEW: BOC Seen Cutting In June As Economy Fades-BDC)
While St-Arnaud is more dovish on when rates fall, he says the cycle will be less than the market expects given signs the neutral rate has crept up further than the Bank estimates. The Bank's last forecast raised neutral 25bps to 2.75% and economists see as many as four rate cuts this year and reductions as far as 2.5%.