MNI INTERVIEW: BOC Will Cut At Next Three Meetings- Sen Gignac

MNI (OTTAWA) - The Bank of Canada will deliver interest-rate cuts at the remaining three decisions this year following Wednesday's reduction as weakness in the job market mounts, according to Clement Gignac, a member of the Senate banking committee and a former Quebec minister who has also advised the federal finance department. 

Governor Tiff Macklem appeared to suggest a string of reductions is needed in his press conference when he went beyond the official statement to say growth needs to pick up to keep the economy in balance, Gignac told MNI in a phone interview. 

“Monetary policy is too restrictive, and they have no time to lose,” Gignac said. (See: MNI INTERVIEW: BOC Free To Cut At Next Four Meets- Brett House)

The rate decision also re-framed a list of indicators officials were tracking for signs of persistent inflation in a way that suggested they are now more focused on downside risks, said Gignac, whose Senate committee brings Macklem into hearings reviewing economic conditions. 

The Bank lowered its overnight rate to 4.5% from 4.75% Wednesday, following up on a June cut that was the first in this cycle within the G7. Macklem said more cuts can happen as inflation risks become balanced between sticky housing and services prices and economic slack holding down the cost of other products. Economists so far appear split on whether the Bank skips a cut at one of its remaining decisions this year.

CONSECUTIVE CUTS 

“I think we go straight to 3.75% by year-end, rate cuts for each of the upcoming three meetings this year, because he seems now to realize that the excess capacity is more than expected,” Gignac said. The rate hasn't been that low since December 2022. 

While Macklem downplayed a question about the potential for a larger-than-normal rate cut, Gignac said that's not impossible if the economy stumbles. There are already signs of strain in the job market, with youth unemployment reaching toward 15%, Gignac said. 

Per-capita GDP is also in decline amid record immigration and modest growth. There is a small risk that headline and core inflation undershoot the Bank's 2% inflation target and officials know that if they get behind the lags in monetary policy will make it more difficult to balance the economy, he said.

“Remember that the Bank of Canada was pretty skeptical about a jumbo rate hike in 2022 at the beginning of normalized monetary policy” and then it made several such steps, Gignac observed.

MAIN STREET RECESSION 

While population growth makes a traditional recession where total GDP declines unlikely, weakness in per-person activity is hard to ignore, Gignac said, calling it “a Main Street, undeclared recession.” Policy will be restrictive until those three cuts are made, Gignac said, adding the Bank can't be accused of falling behind the curve because the unwinding of rapid inflation has been sudden and surprised many experts.

Canada's room to cut without tanking the country's dollar may be constrained, Gignac said, especially if the Federal Reserve signals it will hold rates again in September and not cut as investors predict. That may require some guesswork in any case: the Bank's decision is Sept. 4 and the Fed's on Sept. 18. 

“Our situation is different than the U.S., we have excess capacity and our core inflation is lower,” Gignac said. “It will take guts to reduce interest rates again in Canada in September if the Fed doesn’t move."