MNI INTERVIEW: BOC Rate Cuts Are Justified: Ex Adviser Ambler
Keeping tight monetary policy threatens an emerging soft landing, Ambler says.
Canada's central bank has room to start a series of interest-rate reductions beginning in June as inflation settles down and tight monetary conditions threaten an economic soft landing, former BOC adviser Steve Ambler told MNI.
Governor Tiff Macklem could have justified lowering the 5% overnight rate on Wednesday instead of his decision to hold according to Ambler, a retired Universite du Quebec a Montreal professor and a member of CD Howe's shadow monetary council. Still, it's prudent to gather more evidence inflation will land back at the 2% target, he said.
Some short-term price measures are tracking well below target and headline inflation may also step down as the base effect of the jump in mortgage rates fades away, he said. Annualized inflation over the last three months is now 1.3%, for example. While the Bank must protect its credibility by finishing the inflation fight, Macklem can also sense the rare feat of a soft landing may be at stake if real rates become too tight, Ambler said.
“It’s time to cut, and if they start a cycle of cuts in June and then lower it by maybe 25 basis points in every announcement, I think that will keep the soft landing in place,” Ambler said. Without a June cut "the plane might actually run off the end of the runway,” he added. (See: MNI INTERVIEW: BOC Seen Cutting In June As Economy Fades-BDC)
Macklem told reporters that a June cut is in the realm of possibility if inflation keeps moving in the right direction, but also said the the policy group came to a consensus more proof is needed. The Bank's 10 rate hikes to the highest since 2001 has already led to some negative quarterly GDP growth and unemployment has climbed by a percentage point, though wage gains and services prices remain elevated. (See: MNI INTERVIEW: BOC's Macklem Says Can Move Rapidly If Needed)
QUARTER POINT CUTS
The Bank wants to avoid being caught in a situation where say a spike in crude oil prices took inflation off track again after several years of global setbacks, Ambler said. Recent government changes on the pace of immigration also clouds the economy's potential. Those question marks are likely behind the Bank's vague forecast of restoring 2% inflation sometime next year.
“They don’t want to over-promise and under-deliver,” Ambler said. That caution also means that while rates will decline officials will stick with quarter-point moves.
“I would be really surprised if they cut by more than 25 basis points for any given announcement,” he said. “I can see rates coming down by 25 basis points with every announcement starting June, for the next little while.”