MNI INTERVIEW: BOC Seen Cutting In June As Economy Fades-BDC

Canada's central bank will start cutting interest rates in June as inflation comes in line and because the economy would head towards recession absent some monetary relief, the chief economist of the federal small business bank told MNI.

Pierre Cleroux of BDC said in an interview in Ottawa Monday the Bank of Canada will lower rates three or four times this year as officials gauge inflation pressures and an economic slowdown, while attempting not to rekindle the housing market or price expectations.

“Inflation is close to target," he said, noting durable goods price gains have slowed to 0.5%. "They are going to wait a little bit to make sure that expectations are anchored at 2%, but we’re close now.” Canada's headline inflation rate has slipped to 2.8% though core prices remain above 3%.

“We’re not in recession but the economy has really slowed down. If you keep interest rates at this level for too long, you will create a recession,” he said. “Every day, people renew their mortgages, their car loans, they pay more, so they have to reduce their consumption. So if you keep interest rates at 5% for another year, you will create a recession.”

SCARCITY OF WORKERS

Governor Tiff Macklem held his policy overnight rate at the highest since 2001 at 5% earlier this month and said he's balancing upside inflation risks against the danger of throttling economic expansion. He also told MNI that while he can move fast if needed there needs to be broad and sustained easing of price pressures. (See MNI INTERVIEW: BOC's Macklem Says Can Move Rapidly If Needed)

The Bank of Canada and the Federal Reserve will cut rates in a similar fashion and that means Canada's dollar will remain stable against its U.S. counterpart this year, Cleroux said. One risk for the 75% of Canada's exports that go to the U.S. are elections that could bring new trade protectionism, such as Donald Trump's talk of a 10% across-the-board tariff.

“That will hurt the Canadian economy, not enough to create a recession, but it will slow down the economy,” said Cleroux, who has also worked as the Quebec government's assistant deputy minister for economic development and trade. Trump's previous tenure brought narrow but substantial tariffs on aluminum and steel rather than a sweeping trade levy, and he could again change his mind on broad action against Canada, Cleroux noted.

While high interest rates are delaying or halting some new investments for now, over the longer term business owners must find ways to deal with the large wave of retirements that will keep the job market tight and salary gains elevated, Cleroux said. Small- and medium-sized firms employ almost nine in 10 of Canada's private-sector employees, Montreal-based BDC estimates.

“I strongly believe it’s the future for Canada, because we will have more jobs than people for the next decade” he said. “Immigration is helping, but immigration isn’t a magic solution.” (See MNI INTERVIEW: BOC Stays Restrictive Through 2024- Ex Adviser)