MNI INTERVIEW: BOC Seen Cutting Again In Sept-Conference Board

The Bank of Canada will refrain from cutting interest rates again in July to make sure inflation is getting under control and with an eye on avoiding a wide divergence from the Federal Reserve, waiting until September to deliver the next reduction in borrowing costs, Conference Board chief economist and former Bank researcher Pedro Antunes told MNI.

While the Bank is within sight of pulling off a soft landing its bigger concern remains vanquishing inflation, he said. Waiting until September to follow up on Wednesday's quarter-point cut to 4.75% is in line with the Conference Board's view the Fed will cut later this year, Antunes said.

“It may be a while before we get inflationary pressures fully down” including pressure rippling out from the United States, said Antunes, who has also consulted with the finance department on budget projections. (See: MNI INTERVIEW: BOC Rate Cuts Are Justified: Ex Adviser Ambler)

Governor Tiff Macklem said that more rate cuts can flow as inflation eases but reductions will be slower than the hikes during the pandemic rebound when, they moved from near zero to the highest since 2001 at 5%. While there is some kind of limit on how far the Bank can diverge from the Fed, Macklem said he's nowhere near that point.

PATH DOWN IS SLOWER

Antunes said that in the background the prospect of much lower Canadian borrowing costs and a potential slide in the country's dollar is likely on the minds of officials in Ottawa. At the same time, he agreed with the Bank's argument that the economy is on a different path than its U.S. counterpart, where inflation remains stubborn to Fed officials. (See MNI POLICY: Fed Officials Clash Over Extent Of Policy Restraint)

The Conference Board estimates that after incorporating record immigration to Canada, by some measures the economy per capita is in a slump akin to the deep recession of the early 1990s. Half of mortgage clients are also in for a painful refinancing in the next few years. “The economy I would suggest is quite weak,” in Canada, Antunes said.

Over time that will lead the Bank to cut borrowing costs back towards a neutral rate of around 2.75%, Antunes said. Neutral rates will be higher than in the past due to elevated global government debt and China's shift away from adding to global savings, he said. While Canada's finance minister is taking credit for fiscal responsibility that laid conditions for an rate cut ahead of G7 peers, Antunes said he's not convinced given recent spending jumps.

“The path coming down is going to be quite slower,” for Bank rates, he said. “Longer-term and short-term rates are going to stay well above where they were before the pandemic.” (See: MNI INTERVIEW: BOC Can Move Far Once Rate Cuts Begin- Devlin)

The Bank's rate cut is the first in more than four years, and two years after inflation peaked at about 8% or four times the target. “It will have spelled for the Bank a period where the bank very successfully managed high inflation pressure,” Antunes said. “This is looking straight out of the textbooks.”