MNI INTERVIEW: BOC Open To 50BP Oct Cut: Ex Adviser Williamson
MNI (OTTAWA) - The Bank of Canada has scope to mirror the Federal Reserve's half-point cut at the Oct 23 decision with inflation cooling in both economies and the job market buckling faster north of the border, former adviser to both central banks Stephen Williamson told MNI.
Governor Tiff Macklem will ultimately cut borrowing costs from today's 4.25% to around the Bank's estimate of neutral of 2.75% according to Williamson, who now teaches at Ontario's Western University. He has served as a BOC research fellow and as a St. Louis Fed vice president of research, and noted the Fed's jumbo move came after only mild weakness in the U.S. job market.
“The influence is they're cutting 50 basis points in the context of nothing bad obviously happening,” Williamson said. “That could open the door for 50 basis points next time the Bank of Canada Governing Council meets. The labor market in Canada is softer than in the U.S." (See MNI INTERVIEW: BOC Has Scope To Cut To Neutral- BDC's Cleroux)
While Bank officials are considering moving slower or faster based on competing inflation risks after three straight quarter-point reductions, Williamson's view lines up with a growing number of economists and investors who see the half-point move as most likely. Inflation has slowed to the 2% target for the first time in three years, unemployment is up more than a percentage point and flash figures suggest Q3 growth will fall well short of the Bank's 2.8% estimate.
“There may be some worry at the Bank of Canada that things maybe are a little bad, and maybe a 50-basis-point cut is appropriate. I’d put some money on that. It’s still not a foregone conclusion,” Williamson said.
WE'RE NOT PANICKING HERE
While the Fed's actions will never directly determine what the BOC does, the outsized start of loosening after months of waiting indicates that weakness is coming to the North American economy, Williamson said. The Bank's single inflation target as opposed to the Fed's dual mandate was recently altered to allow some focus on the job market when inflation is stable, he pointed out, and officials have always appeared to tacitly respond to job-market swings.
“Part of what caused them to start cutting, and the Bank of Canada is like a leader in the world cutting rates, maybe not the first, but well ahead of the U.S., at least, and I think part of that was responding to labor market conditions,” Williamson said.
Macklem would also likely seek to echo Fed Chair Jerome Powell if he went for 50bp, offering a message of calibration at a time when a soft landing remains in sight, Williamson said. “They do the same thing. They kind of explain, well, things, things are somewhat soft, but we're not panicking here,” he said. (See: MNI INTERVIEW: BOC To Keep Cutting As Far As 3%- Ex Staffer)
The Bank hasn't cut its policy rate by more than a quarter point since March 2020 when it was set at a record low 0.25% during the pandemic. Outside of that period, in the era of fixed meeting dates that kind of move has only happened in 2008 and 2009 during the global financial crisis and in 2001 following the 9-11 terrorist attacks.
Canada appears to be avoiding some outside scenarios that could pull inflation off track, Williamson suggested. The Bank projects inflation will settle around its 2% target sometime next year.
While some mortgage borrowers are facing painful re-financings, the Bank's peak rate of 5% wasn't that high historically, he said, and regulators helped by adding tougher stress tests on borrowers. The recent immigration surge hasn't led to major upside inflation pressure, Williamson said, even with the government allowing in a cohort having lower education and skills than in the past.