BoC - The Big Ease-Y
The Bank of Canada cut its key lending rate 25 basis points to 4.75% today, the first reduction in more than four years, the first such move since Tiff Macklem became Governor, and the first cut by a G7 central bank this cycle. The rate cut was largely built in by financial markets, but was far from a sure thing, so the wording really matters here. The overall tone was constructive for further cuts, and frankly a bit more dovish than we would have expected, but still with a healthy dose of caution. The Bank is clearly impressed with the broad moderation of underlying inflation in 2024, and plainly states that policy does not need to be so restrictive any longer, but is also obviously wary about moving too quickly.
The key message from today is that they are going to take this on a meeting-by-meeting basis, so every CPI report matters, as does every GDP and jobless rate release, to a lesser extent. We have been pencilling in rate cuts every other meeting for now as a base case, but—like the Bank—that call is data dependent. There are two CPI (and jobs) reports prior to the July 24 decision; if the inflation reports mimic the very mild results seen so far this year, a cut is very much on the table for that decision as well.
Some key quotes from Governor Macklem's Opening Statement (which has more meat than the press release):
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On further cuts: "If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate. But we are taking our interest rate decisions one meeting at a time."
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On the breadth of inflation: "...the proportion of CPI components increasing faster than 3% is now close to its historical average, suggesting price increases are no longer unusually broad-based"
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On why they thus cut: "This all means restrictive monetary policy is working to relieve price pressures. And with further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive."
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On what could go wrong: "We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made. Further progress in bringing down inflation is likely to be uneven and risks remain. Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected, or if wage growth remains high relative to productivity."
For the economy, one 25 bp move, which had mostly been priced in, is not going to make a big impact all by itself. However, it will give at least a small bump to sentiment among borrowers, and brighten the mood in what has been a remarkably quiet housing market. As rates continue to gradually recede in coming quarters, the weight will be lifted off the struggling household sector, likely setting the stage for a modest improvement in growth in the year ahead.
Bottom Line: The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy. This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means. The Bank's tone is a bit more dovish than expected, but each and every cut this year will require evidence that inflation is calming.
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Douglas Porter
Chief Economist and Managing Director
Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Economist at BMO Financial Group and author of the popular…(..)
View Full Profile >The Bank of Canada cut its key lending rate 25 basis points to 4.75% today, the first reduction in more than four years, the first such move since Tiff Macklem became Governor, and the first cut by a G7 central bank this cycle. The rate cut was largely built in by financial markets, but was far from a sure thing, so the wording really matters here. The overall tone was constructive for further cuts, and frankly a bit more dovish than we would have expected, but still with a healthy dose of caution. The Bank is clearly impressed with the broad moderation of underlying inflation in 2024, and plainly states that policy does not need to be so restrictive any longer, but is also obviously wary about moving too quickly.
The key message from today is that they are going to take this on a meeting-by-meeting basis, so every CPI report matters, as does every GDP and jobless rate release, to a lesser extent. We have been pencilling in rate cuts every other meeting for now as a base case, but—like the Bank—that call is data dependent. There are two CPI (and jobs) reports prior to the July 24 decision; if the inflation reports mimic the very mild results seen so far this year, a cut is very much on the table for that decision as well.
Some key quotes from Governor Macklem's Opening Statement (which has more meat than the press release):
-
On further cuts: "If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate. But we are taking our interest rate decisions one meeting at a time."
-
On the breadth of inflation: "...the proportion of CPI components increasing faster than 3% is now close to its historical average, suggesting price increases are no longer unusually broad-based"
-
On why they thus cut: "This all means restrictive monetary policy is working to relieve price pressures. And with further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive."
-
On what could go wrong: "We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made. Further progress in bringing down inflation is likely to be uneven and risks remain. Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected, or if wage growth remains high relative to productivity."
For the economy, one 25 bp move, which had mostly been priced in, is not going to make a big impact all by itself. However, it will give at least a small bump to sentiment among borrowers, and brighten the mood in what has been a remarkably quiet housing market. As rates continue to gradually recede in coming quarters, the weight will be lifted off the struggling household sector, likely setting the stage for a modest improvement in growth in the year ahead.
Bottom Line: The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy. This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means. The Bank's tone is a bit more dovish than expected, but each and every cut this year will require evidence that inflation is calming.
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