The politics of bank rate cuts
THE CANADIAN PRESS/Adrian Wyld
The best bit of good news for the Canadian government this week came from U.S. inflation data released on May 15 that showed price pressures appear to be back on a downward track in the world’s largest economy. The data abruptly put an end to three straight stronger-than-expected inflation readings that had spooked the markets.
The report essentially revived the idea that we’ll be getting rate cuts in the U.S. this year. And the prospect of rate cuts in the U.S. will make it easier for the Bank of Canada to cut interest rates here.
Markets are pricing in a 50-50 chance the Bank of Canada will cut interest rates as soon as its June 5 policy decision.
Economists are anticipating we will get as many as six rate cuts over the next 18 months, lowering interest rates by about 1.5 percentage points – which will be a relief to both indebted Canadians and a government looking for some sort of an economic tailwind.
The central bank’s pivot toward lower rates however does hold some political considerations for Bank of Canada Governor Tiff Macklem.
Everyone will be rooting for a smooth rate cut cycle, but the Bank of Canada remains under probation with Conservatives. While public attacks have waned, it’s important to note that Conservative Leader Pierre Poilievre has not withdrawn his threat to fire Macklem should he come to power.
The country’s main opposition party will want to be assured the central bank’s decisions are being informed solely by inflation data, rather than any political pressure to ease borrowing costs – either from the federal Liberals or provincial premiers who have been dangerously cheerleading rate cuts in recent months.
It creates a delicate situation for Macklem, who will err on the side of caution and be hyper-focused on inflation numbers. Rate cuts in the U.S., however, do give him political cover as well.
