Bank of Canada shows signs rate cut could be coming soon
At a policy decision on Wednesday, the Bank of Canada kept its policy rate unchanged at the current prohibitively high levels (with the overnight rate at five per cent) but indicated it will cut as early as June, should inflation data continue to show signs of easing between now and then.
The Canadian Press / Adrian Wyld
Bank of Canada Governor Tiff Macklem announced this week the bank was keeping its policy rate unchanged.
Just over two years since the start of the Bank of Canada’s rate hiking cycle, the nation’s central bank is beginning to give clear signs that it’s preparing to loosen its grip on the nation’s economy.
At a policy decision on Wednesday, the Bank of Canada kept its policy rate unchanged at the current prohibitively high levels (with the overnight rate at five per cent) but indicated it will cut as early as June, should inflation data continue to show signs of easing between now and then.
You can find an excellent synopsis of the news from Mark Rendell’s piece in the Globe and Mail.
The key line in the policy statement was that the central bank “will be looking for evidence that this downward momentum is sustained.” At a press conference, Governor Tiff Macklem acknowledged a cut in June is within the “realm of possibilities.”
To the bank, falling inflation suggests the economy has become weak enough to accommodate lower interest rates. Macklem would be more than happy to ease the burden on indebted households – but he needs to be sure he doesn’t act prematurely.
Bank of Canada officials have worked hard over the past two years to rebuild credibility. They don’t want to move prematurely and make another policy mistake.
The inflation sweet spot for the bank is two per cent. The latest numbers show inflation was 2.8 per cent in February. The Bank of Canada, which won’t wait until two per cent to cut, is estimating inflation will slow to below 2.5 per cent in coming months and will be near two per cent by the end of this year. We get inflation data for March on Tuesday and April data on May 21. The next interest rate announcement is June 5.
The bad news is that economists are paring back expectations for the scope and pace of rate cuts. Currently, analysts are anticipating the policy rate will be no lower than 4.25 per cent by the end of this year – which is still historically high.
Stubborn inflation numbers in the U.S. meanwhile will give policy makers in Canada reason to be careful about cutting here.
