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MNI INTERVIEW: Undershoot Risk Drives BOC Cuts- Ex Adviser

MNI (OTTAWA) - Canada's central bank will keep cutting borrowing costs into the first half of next year as Governor Tiff Macklem shifts his concern to a potential undershoot of the inflation target, and the speed of reductions toward a more neutral policy will hinge on the extent of further disinflation, former adviser Steve Ambler told MNI.

The Bank of Canada's decision Wednesday to lower interest rates by a quarter point for a third meeting to 4.25% met expectations, but Macklem's comments about undershooting the 2% target "was a fairly significant change in tone," he said.

"That means two more (rate cuts) this year then it will be another couple next year," according to Ambler, a retired Universite du Quebec a Montreal professor and a member of CD Howe's shadow monetary council. "I find it hard to imagine that they will go quickly much below 3.25%." 
 
Next year's reductions could come at the first couple of meetings in 2025 in January and March but could also delayed until the middle of next year, he said, due to what the Bank called competing forces around inflation. (See: MNI INTERVIEW: Big CPI Undershoot Unlikely- Ex-BOC Schembri)
 
Lowering rates another percentage point would bring borrowing costs to about Ambler's estimate of neutral and ensure monetary policy doesn't become even more restrictive as inflation slows. The Bank has said only that after some bumps inflation will settle at target sometime in 2025, an imprecision Ambler said is justified by the risk of more geopolitcal shocks and how much Canada's economy may slow. 
 

HOT AND COLD DANGERS

Officials have discussed scenarios where they could move slower and also going by 50bps if needed, Macklem told reporters after Wednesday's decision, adding there was a clear consensus to cut by a quarter point again this time. The Bank pointed to a risk the economy will come in slower than projected over the second half of the year, and the threat of upward pressure on costs of shelter and other services even as many other products return to normal pricing.
 
There's still some danger the housing market flares up again, Ambler suggested. That happened last year when investors saw signs the Bank was pivoting away from rate hikes. "If they keep on going and then the dangers flip right around again, they might encourage the real estate markets, other markets, to overheat," Ambler said. 
 
Governing Council is more broadly concerned about their credibility after the tough fight to wrestle down inflation, Ambler said. "If inflation were to tick back up on that kind of thing, I think they would pause, and we would be looking more towards at least the middle of 2025 before inflation gets back to target and we get to somewhere that might be called the neutral rate." (See: MNI INTERVIEW: BOC Cuts Will Be More Hesitant- WLU Researcher)
 
Inflation excluding mortgage costs has been well behaved so far this year, Ambler said, and he agrees with another indication from the Bank that prices are normalizing.
 

Macklem in response to a press conference question from MNI didn't specify what kind of inflation undershoot would draw a policy response, but Ambler said it's a live issue. "If we're hitting 2%, I would suspect there's going to be a couple of months where it does go below two," he said. "If we see three months below 2% and then it gets down below 1.7% then I think the Bank is going to start being worried."

MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com
Bank of CanadaPolicy NewsHomepageBellCanadaCentral Bank NewsExclusiveInterviewGlobalStoryRegionNorth America
MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com
Bank of CanadaPolicy NewsHomepageBellCanadaCentral Bank NewsExclusiveInterviewGlobalStoryRegionNorth America

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