MNI INTERVIEW: BOC To Skip Cuts At 2 Of 4 Meets This Year- ATB's Parsons

The Bank of Canada will skip rate cuts at two of four remaining meetings this year and July is probably too soon to follow up on this month's reduction, according to a former top provincial finance official who in December correctly called the BOC's first move.

Reductions are constrained by caution around making sure inflation gets all the way back to target and the shadow of delayed Fed easing, said Mark Parsons, formerly Alberta's chief departmental economist and assistant deputy minister of economics, and now chief economist at ATB Financial in Edmonton. Given potential wiggles around monthly inflation reports, the exact timing of BOC moves is less of a focus than the overall path, but cuts in September and December make sense, he told MNI in an interview.

“The Bank of Canada is going to be very cautious and keep an eye on that inflation data to make sure that the problem is really moving into the rear-view mirror,” said Parsons, who has also worked as a researcher in Canada's finance department.

Most economists polled by MNI since the June 5 quarter-point cut to 4.75% expect a repeat next month, with about a third saying it will come in September or later. Governor Tiff Macklem said multiple cuts are coming if inflation keeps trending in the right direction. (See: MNI INTERVIEW: BOC Free To Cut At Next Four Meets- Brett House)

Officials are hesitant to make a string of cuts, and are monitoring any signs of wage gains out of line with labor productivity, indications that the Fed will cut just once this year or Canadian dollar weakness which would push up import prices, Parsons said.

BOC HAS BEEN CLEAR

Parsons predicted the June rate cut back in December. Some economists in the days before the decision were convinced a move would be delayed to July even as Macklem said there was progress on trend inflation. “The Bank of Canada was pretty clear in what they wanted to see and they got what they were looking for,” Parsons said.

The economy of Alberta, Canada's energy hub, will grow faster than the national average over the next few years according to the ATB forecast. That's only partly because of new projects such as the expanded TMX oil pipeline Parsons said, pointing to homebuilding, rising population and gains in other industries. “What we’re seeing is broader growth than what we’re used to in the past, this is not a classic energy boom,” he said.

Borrowing costs remain high enough to slow the economy despite the Bank's first rate cut of the cycle , he said. 

“We’re not expecting much from the consumer in 2024 and weakness will persist into 2025, and that’s because even as short-term interest rates decline, more and more Canadians and Albertans are going to be going out and renewing their mortgages at higher rates.”

Alberta's growth lags past energy booms, Parsons said. TMX's expansion will cut the discount on the province's heavy crude versus WTI to just USD15 per barrel from USD18, ATB estimates. Benchmark oil and gas prices are also seen falling over the next few years. That has energy companies focused on optimizing current projects rather than authorizing new ones, Parsons said.

Past megaprojects helped send Canada's dollar to record highs, and ATB's current forecast is for moderate currency appreciation. Parsons' outlook clashes with some market views for the currency to slip as the Bank cuts ahead of the Fed. Canada's dollar can strengthen whenever the Fed cuts and if safe-haven flows moderate, Parsons said. “We think that a lot of that (weakness) has already been priced in,” he said. “The U.S. dollar could lose some of its strength as the Federal Reserve starts to cut, and also as risk diminishes.”