Is the Bank of Canada inching towards a rate cut?

June rate drop remains a distinct possibility, says economist

Is the Bank of Canada inching towards a rate cut?

The Bank of Canada held fire on cutting interest rates in its latest announcement – but it’s continuing to show signs that it could be comfortable bringing rates lower soon, according to a top economist.

Andrew Grantham (pictured), senior economist at Canadian Imperial Bank of Commerce (CIBC), told Canadian Mortgage Professional that the central bank’s decision yesterday, which saw its benchmark rate remain unchanged at 5.0%, was an unremarkable move that leaves the door open for cuts later in the year.

“There weren’t really any surprises,” he said of its statement. “The Bank of Canada is still moving very gradually in the direction of being comfortable cutting interest rates, but they’re not there yet. So the decision to keep interest rates at 5% was very much expected.

“There was some change in the language to suggest that they are moving a little bit closer to actually providing that interest rate relief. But what they need to see is further sustained downwards momentum in some of their core inflation measures.”

Macklem opens the door to a June cut

In comments made at the press conference following the Bank’s announcement, Governor Tiff Macklem gave his strongest hint yet that a June cut could be in the cards, simply stating “Yes” to a question asking whether it was in the realm of possibilities.

For market watchers hoping to see a rate cut as soon as the Bank’s June meeting, the good news is that two more consumer price index (CPI) readings are due between now and that decision, scheduled for June 5.

That means the central bank could have two prime examples for bringing rates lower at its next announcement – “as long as the data, obviously, plays ball and comes in as they want it to,” Grantham said.

The Bank’s Wednesday statement continued the careful tone it’s used for most of this year, indicating that while inflation is slowing, shelter price inflation is “still very elevated” and the overall consumer price index (CPI) remains too high.

It struck a neutral tone, Grantham said, reflecting the “wait-and-see” approach that’s pervaded its outlook throughout much of 2023 and 2024 – although there was an interesting reference to housing market activity, with residential investment strengthening as a result of strong housing demand.

Still, “we’re coming from very low levels of activity – particularly if you think about activity in per capita terms,” he added. “There’s a lot of people sitting on the sidelines… [and] once interest rates do start to [fall], there’s clearly going to be a resurgence in demand.

“It’s just that unless interest rates come down very quickly, very suddenly, that could just be short-term increases that could add to inflationary pressures. It’s not something that they should really be worried about, persistent into 2025.”

How is the Bank of Canada assessing the current inflation outlook?

Inflation is now expected to hover close to 3% until the end of the first half of 2024, dipping below 2.5% in the second half and reaching the Bank’s 2% target at some point next year.

The CPI has ticked slowly downwards since the middle of 2022, when it hit a 39-year high of 8.1%, to its current level of 2.8%, which is technically within the central bank’s target range.

While the Bank remains steadfast in its commitment to bring inflation back to the 2% target, hitting that point on the dot is unlikely to be a prerequisite for cutting rates, particularly with Macklem relaxed in recent months on the issue.

Rather, Grantham said it will be more concerned with the prospect of an uptick or resurgence in inflation before the next announcement.

“It’s really their core measures of inflation they’re looking at. They have come down – they just want to see evidence that they’re going to stay where they are or decelerate further before cutting interest rates,” he said.

“I don’t necessarily think they need to see inflation come down further. They just want to make sure it’s not going to reaccelerate.”

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