Bank of Canada council unanimous on June rate cut, minutes reveal

Potential for further cuts also discussed

Bank of Canada council unanimous on June rate cut, minutes reveal

The Bank of Canada's governing council unanimously agreed to cut interest rates in June, according to a summary of their deliberations released on Wednesday.

After observing four consecutive months of easing core inflation and signs of continuing downward pressure on prices, council members agreed it was the right time to reduce rates. The council was divided on the timing of rate cuts, especially during their April meeting.

“Governing council discussed how the accumulated evidence improved their confidence that progress toward the 2% target would be sustained,” the summary read. “Members agreed that with further evidence showing that underlying inflation is easing and on a more sustained trajectory toward 2%, monetary policy no longer needed to be as restrictive, and a reduction in the policy rate was appropriate.”

While there was a discussion on whether to delay the cut until July for additional inflation data, the consistent trend of core inflation below 3% provided enough assurance to proceed with the June cut.

Dollar divergence

The council also considered the potential impacts of diverging Canadian and US monetary policies on the Canadian dollar.

“Members discussed many potential drivers that could affect the exchange rate, including market expectations for monetary policy divergence,” the statement noted. “While members agreed there are likely limits to how far monetary policy in Canada can diverge from US policy, the limits were not close to being reached.”

Overheated housing market

Despite their confidence in the inflation trajectory, the council spent considerable time evaluating potential risks to the economic outlook. One significant concern is the large number of households facing mortgage renewals this year, which could curb consumer spending.

Other risks include the possibility of an overheated housing market driven by lower interest rates, persistent wage growth leading to higher service costs, and strong population growth putting upward pressure on shelter prices. Additionally, ongoing geopolitical uncertainties pose risks to global supply chains.

More rate cuts ahead?

The council concluded that further rate cuts should be anticipated if inflation continues to trend towards the target.

“Members also agreed that monetary policy easing would likely be gradual given that inflation is forecast to ease toward the target gradually,” the deliberations summary read. “The timing of any further reductions in the policy rate would depend on incoming data and its implications for the future path of inflation.”

Desjardins chief economist Jimmy Jean expects the central bank to ease policy three more times this year, potentially ending 2024 with a policy rate of 4%.

“Our view remains that the Bank of Canada will ease policy three more times this year, finishing 2024 with a policy rate of four percent,” Jean said.

Read next: What will influence the BoC's approach to rates for the rest of 2024?

BMO Economist Benjamin Reitzes echoed this sentiment, suggesting that back-to-back rate cuts are possible depending on upcoming inflation data.

“Overall, nothing here to change our view that the next two inflation prints will likely determine whether the next cut is in July or September,” Reitzes said. “However, they’ll likely become more cautious as we get closer to something that could be around neutral.”

As the Bank of Canada monitors economic indicators closely, the coming months will reveal the pace and extent of further rate adjustments, with the next policy announcement scheduled for July 24.

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