Rpt-MNI INTERVIEW: BOC Seen Cutting Rate Around Yr-End

The Bank of Canada will likely keep interest rates at the current peak of 4.5% until around the end of this year, shunning the cut some investors are predicting to make sure inflation keeps moving back to target, former adviser Steve Ambler told MNI.

Governor Tiff Macklem's decision Wednesday showed more confidence he also doesn't need to hike for a ninth time after signaling a pause earlier this year, Ambler said by phone from Montreal. That optimism includes for example the Bank's view price gains will slow to 3% by midyear and the idea the Fed needs less tightening amid turmoil set off by the collapse of Silicon Valley Bank, Ambler said.

“So far so good, they are feeling pretty good about their decision to pause,” said Ambler, a retired Université du Quebec à Montréal professor who's on a shadow monetary council at the C.D. Howe Institute.

Canadian policymakers won't even start looking at a rate cut until the inflation rate fades to less than 3%, said Ambler. While there are still risks around hot wage and inflation expectations they are unlikely to become unanchored, he said.

"As long as growth doesn’t collapse and as long as there aren’t these other persistent elements in certain sectors live the services sector and food, I think they will hold off cutting rates until towards the end of the year, the beginning of the next," said Ambler.

HOLDING OFF

The slowing global economy touched on this week by the IMF is another reason to keep rates steady, Ambler said. The Bank's economic forecast mirrored the IMF's view that inflation will remain well above most central bank targets through this year and that tight monetary policy is still needed.

Macklem also told reporters today a cut isn't the mostly likely scenario, and earlier in that press conference said "several things still have to happen" to get inflation all the way back to the 2% target.

There are reasons for optimism inflation will keep slowing, with the recent three-month trend of CPI coming in at 1.6%, Ambler said. Price gains may also fade as more of last year's big price increases fall out of the 12-month inflation rate, he said.

THE R-WORD

“There may be persistent components, but I don’t think there’s anything to indicate inflation is going to take off again,” Ambler said.

The Bank identified a major global downturn as the big risk and that is one wild card, Ambler said.

“If there is a real economic slowdown, the Bank’s going to be worried about the r-word” of recession. “If they really have reached the peak in terms of the overnight rate, if it’s not going to go higher than 4.5, then the question if there’s a big slowdown is are they going to start to cut? That’s going to be a tough decision.”