A person walks past the Bank of Canada on April 10 in Ottawa.Adrian Wyld/The Canadian Press
The Bank of Canada kept its policy interest rate steady for the sixth consecutive time but opened the door to monetary-policy easing in the coming months, with Governor Tiff Macklem acknowledging that a June rate cut is on the table.
The central bank’s governing council kept the benchmark overnight rate at 5 per cent on Wednesday, a level reached last summer after one of the most aggressive campaigns of rate hikes on record.
With price pressures in Canada easing faster than expected in recent months, the bank has become more confident that inflation is moving sustainably back to its target, suggesting interest rates don’t need to remain at a two-decade high much longer. High interest rates make it more expensive to borrow money and service debts with the goal of slowing the economy and cooling inflation.
Mr. Macklem said in a press conference after the rate announcement that the governing council has begun debating when to lower interest rates, and that a rate cut at the next meeting in June was “within the realm of possibilities.”
“I’m not going to put it on a calendar,” Mr. Macklem said in a follow-up interview with The Globe and Mail. “But we’ve been pretty clear, we’re encouraged by the progress we’ve seen.”
Annual Consumer Price Index growth came in below 3 per cent in January and February, putting headline inflation within striking distance of the bank’s 2-per-cent target. Core inflation measures, which strip out volatile prices, are trending down, while other indicators, such as wage pressures and inflation expectations, are easing.
“They’re all moving in the right direction,” Mr. Macklem said. “What we’re looking for is for that to be sustained. We want to be confident that that’s durable. And when we are confident that it’s durable, it will be appropriate” to start cutting rates.
Mr. Macklem’s comments on Wednesday were his clearest to date about a long-awaited monetary-policy pivot, which could offer relief to homeowners with impending mortgage renewals. However, it also risks touching off another real estate frenzy with would-be buyers waiting on the sidelines for mortgage rates to drop.
“When it comes to this particular Bank of Canada Governor, this is as explicit as he would like to get,” Beata Caranci, chief economist at Toronto-Dominion Bank, said of Mr. Macklem’s comments.
She said she had previously been expecting the first rate cut to come in July. “But given that he actually sent a signal today, I would say it’s a 50-50 shot right now that they go for June, and the lock will be what we see in the next two inflation reports,” she said.
The Bank of Canada’s dovish tilt on Wednesday was somewhat overshadowed by stronger-than-expected U.S. inflation data, which came in at 3.5 per cent. This caused traders to pare back bets on rate cuts from the U.S. Federal Reserve. Both Canadian and U.S. bond yields surged on the inflation news, and the Canadian dollar sold off.
Interest-rate swap markets, which capture expectations about monetary policy, actually dialled back bets on a June rate cut from the Bank of Canada. Traders now see it as a coin toss, down from a 70-per-cent chance earlier in the week, according to Refinitiv data.
Stronger economic growth and higher inflation in the U.S. puts the Bank of Canada in a tricky spot. If it starts lowering interest rates earlier than the Fed, or moves at a faster pace, that would put downward pressure on the Canadian dollar relative to the U.S. dollar. This could add to inflation for food and other imported goods.
Mr. Macklem said that U.S. monetary policy is not a constraint on his ability to act, given the flexible exchange rate.
“What happens in the U.S. definitely has an impact on Canada. It has an impact through our trade relationship. Our financial markets are very integrated,” Mr. Macklem told The Globe. “But we don’t need to do exactly what the Fed does. We can run our own monetary policy.”
Alongside the rate announcement, the bank published a new economic forecast in its quarterly Monetary Policy Report (MPR), which showed a welcome combination of lower inflation and higher economic growth in 2024. It also upgraded its estimate of the “neutral rate” by a quarter percentage point. This is the theoretical resting spot for interest rates when they’re neither stimulating nor constraining the economy.
Central-bank economists now see inflation averaging 2.6 per cent this year, down from the previous estimate of 2.8 per cent. It is projected to remain close to 3 per cent in the second quarter of 2024, partly as a result of rising oil prices.
Inflation is then expected to move below 2.5 per cent in the second half of the year, led by slower price growth for shelter and food, and return to the 2-per-cent target in 2025.
Over the past year, the Canadian economy has struggled to grow under the weight of high borrowing costs. Consumer spending and business investment have been weak, and the unemployment rate has risen a full percentage point over the past year, hitting 6.1 per cent in March.
The new forecast suggested that things could begin looking up. The bank revised its first-quarter annualized GDP forecast to 2.8 per cent from 0.5 per cent. And it upgraded its 2024 GDP forecast to 1.5 per cent from 0.8 per cent.
Much of this increase is being led by strong population growth, which has continued to drive overall economic growth even as GDP per capita has declined over the past 18 months.
“The growth outlook, it is a little bit more complicated than normal,” Mr. Macklem said. “For most of my career, population growth has been something that looks pretty much like a straight line. But we saw a huge dip during COVID, now we’ve seen a rapid increase.”
He said population will be the key driver of economic growth through the first half of this year. But that will start to change around the middle of the year, in response to new immigration policies from the federal government, capping foreign students and temporary workers.
At that point, growth should be supported by a pickup in consumer spending, a rebound in business investment, and idiosyncratic factors such as the completion of the Trans Mountain pipeline.
Economic growth is also being driven by high levels of government spending. The MPR said growth in government spending is projected to pick up from 2.5 per cent in the second half of 2023 to roughly 3.5 per cent in the first half of 2024. This is partly the result of increased expenditures contained in recent provincial budgets.
“It’s not making it any easier to get inflation down to our 2-per-cent target,” Mr. Macklem said of the increased provincial spending. He declined to comment on the impact of the federal government’s announcements in the lead up to the April 16 budget.
There are still upside risks that could push back the bank’s timeline for cutting rates. Oil prices have risen in recent months and geopolitical tensions could further disrupt international shipping. Meanwhile, real estate prices remain a concern, given high levels of pent-up demand for housing.
“We expect to see more demand pressure in housing going forward. We built that in, and it could end up being stronger than we expected,” Mr. Macklem said. “But there are also risks on the other side. And over all, we think our forecast we put out is reasonably balanced.”
Ultimately, the bank’s decisions about when to cut interest rates will come down to incoming data, Mr. Macklem said. And going forward, interest rates may not follow a smooth path down from their current heights.
“With inflation coming down very gradually, I think it’s reasonable to infer that that policy path will be pretty gradual, too,” he said.
Bank of Canada governor Tiff Macklem says the central bank could begin lowering its key interest rate as soon as its next decision. His comments were made after announcing the Bank of Canada held its key interest rate steady at five per cent. (April 10, 2024)
The Canadian Press