MNI INTERVIEW: BOC To Keep Cutting As Far As 3%- Ex Staffer

MNI (OTTAWA) - Canada's central bank could keep cutting interest rates at each of the next six meetings after doing so twice in the last two months, bringing monetary policy closer to neutral and giving consumers optimism as the labor market stalls, former staff economist Charles St-Arnaud told MNI. 

Those moves would bring today's 4.5% benchmark rate to a range of between 3.5% and 3%, down from the peak of 5% and close to the Bank's estimate of a neutral rate of 2.75%. The Bank's policy rate hasn't been that low since July 2022 as rates surged to check inflation headed to 8%. 

“The Bank of Canada is being very upfront saying they are now rotating their focus away from inflation and to the weakness in the economy,” said St-Arnaud, a former BOC and finance department economist who’s now chief economist at the Alberta Central credit union. “They aren’t on automatic pilot, but rate cuts are now the default for the Bank. They will cut at least another two, or three, times this year.” (See: MNI INTERVIEW: BOC Will Cut At Next Three Meetings- Sen Gignac)

Governor Tiff Macklem said at last month's decision that the balance of risks has shifted to include the potential that inflation undershoots the 2% target, after holding borrowing costs at the highest since 2001 amid investor bets that would trigger a recession. Massive population growth has kept the economy moving ahead but that masks the decline in per-person spending that will need more rate cuts to revive, St-Arnaud said.

FED ALIGNMENT

The Bank's view of near-term consumer spending seems optimistic and the last few inflation and jobs reports point to cracks in the economy, he said. Employment has stalled over the last two months, a new layer of weakness on top of the steady rise in unemployment linked to record population growth. It's unlikely hiring can regain momentum in the second half of the year unless the economy leaps ahead, given a decline in job vacancy rates and surveys showing weak staffing plans, he said. 

“It will take some work to bring the mentality of households to a restart, you will need some gains in disposable income to make that happen. Rate cuts might help, but it’s not going to be a big push to consumption,” he said. (See: MNI INTERVIEW: BOC To Slowly Cut To Neutral Over 2 Yrs- Stillo)

Wage gains have also been slow to catch up to the earlier burst of inflation, suggesting current gains around 5% are more catch-up than a driver of fresh inflation momentum, he said. “The inflationary shock is spread out over a longer period, and that’s important to consider, the speed of that shock is relatively low.”

Officials have said inflation is on the path back to stabilize on target sometime next year and there could be some bumps along the way. St-Arnaud said there's a narrow set of conditions where the Bank would judge inflation is becoming troublesome again. That includes evidence core inflation measures are re-accelerating to a pace faster than 3%, the top of the Bank's target band, he said. The other factor would be a renewed spike in the number of CPI components showing outsized gains.

Continued rate relief can come without a major slump in Canada's dollar now that U.S. monetary policy appears headed in the same direction, St-Arnaud said. “It’s something to be mindful of,” he said. “I don’t think they’re acting in a way so far that’s surprising to markets to the point that it will change expectations dramatically.”