The Canadian dollar and short-term bond yields fell as the Bank of Canada announced its 25-basis-point cut this morning, although the moves were relatively modest and trading in money markets suggests there’s still a fair amount of uncertainty about whether another cut will arrive in July.
The majority of economists, on the other hand, think another reduction in the bank’s overnight rate is probable in July.
The loonie lost about two-10ths of a US cent shortly after the decision, trading at 72.95 US cents. The two-year Canada bond yield, which is particularly sensitive to central bank moves, lost about four basis points and retested support at 4 per cent. Its spread widened against the U.S. two-year bond, whose yield was only down about one basis point to 4.76 per cent.
Money markets were pricing in close to 80 per cent odds that the bank would cut at today’s meeting, so such a move was not fully priced into markets.
Now attention turns to the July meeting. Current swaps pricing suggests another quarter-point cut is not a given. It shows only about 40 per cent odds of another cut in July, according to LSEG data.
Money markets, however, are confident more cuts will arrive at some point this year. By December, an additional 50 basis points of cuts are priced into markets, which would bring the bank’s overnight rate to 4.25 per cent.
Here’s how implied probabilities of future interest rate moves stand in swaps markets, according to data from LSEG (formerly known as Refinitiv Eikon). (This snapshot was taken a few minutes after the BoC decision, but they held steady through the morning’s press conference.) The new Bank of Canada overnight rate is 4.75 per cent. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
Here’s how economists and market strategists are reacting in written commentaries today. Overall, economists think markets are underestimating the chances for a July cut.
Derek Holt, vice-president of economics, Scotiabank Economics
The ones who got it right listened to a different Governor in my opinion. I listened to one named Governor Tiff Macklem when he told us one month ago that “in the months ahead” they will be evaluating additional evidence before deciding when to deliver a first cut. He was very explicit. He said that in written, carefully prepared testimony on two separate days. Just weeks later he turned around and cut. Go figure. ...
Credible monetary policy relies upon clear and consistent communications. The BoC has a consistency problem and this is not helpful to businesses, consumers, governments and markets as they draw up forward-looking plans. ‘Trust’ is not part of the vocabulary to use in discussing the BoC’s moves.
This is a serious issue. Macklem’s communications and forward guidance were awful during the pandemic. He unwisely lured in mortgage borrowers by promising them that the policy rate would be on hold for several years, only to have to back pedal from this overreach. He owns much of the mortgage resets challenge, proving that trust or lack thereof has real effects. He had a chance to deliver more consistency and repair past damage by being consistent today and he balked. Canada remains in the wild west of central banking relative to other central banks that put more of a premium on sticking to their word.
In any event, Governor Macklem was very dovish sounding today. Much more so than I would have expected for a first cut. The BoC basically delivered a total rejection of our narrative which sets up a contest going forward straight into 2025. ...
The Governor’s sudden rush has us revising our call in favour of another cut in July and 100bps of easing this year from 75bps previously. We think they will wish to deliver this 100bps in a straight line fashion until the October meeting. At this point we’re nervous toward the December meeting that follows the US election and have penciled in a pause for that one while nevertheless bringing forward our forecast for a 3.25% policy rate by one quarter to be achieved by 2025Q3.
In my opinion, fiscal and monetary policy have to be viewed as adding upside to our projection for 2.1% growth next year with inflation landing on 2% toward the end of 2025. I believe that monetary policy is sending strong signals that it is moving toward becoming much less restrictive over the next 6–12 months just as fiscal policy is likely to be becoming more incrementally stimulative to the Canadian outlook into an election year. Governments doing this badly in the polls do not spend less; watch for Trudeau/Singh/Freeland to spring the spigot in a Fall economic update and next Winter’s budget ahead of calling a vote. They’ll be able to count on having their chosen pick to run the BoC in their corner as monetary policy becomes more growth supportive into 2025. With the help of monetary and fiscal stimulus, the bias is to raise next year’s growth and inflation forecasts.
We’ll see how all of this works out into 2025. In my opinion, Canada continues to face higher full-cycle inflation risk than the US and the BoC should be much more careful than the Governor sounded today, but we have to incorporate his reaction function at least for a time.
Taylor Schleich and Warren Lovely, economists with National Bank Financial
In the opening statement to the presser, Macklem said it’s reasonable to expect further easing as long as inflation continues to ease. That puts a July cut squarely in focus and we’d be inclined to bet they will ease again at the next meeting. At the same time, we’d note that earlier BoC communications indicated that monetary policy easing this year would be “gradual”. Macklem confirmed this view in the press conference. So although back-to-back cuts may be instituted to start, we’re skeptical they’ll continue at the same pace thereafter. We agree with market expectations that 50 basis points of additional rate relief is appropriate in 2024. In contrast, the consensus [among economists] sees this marking the start of a more aggressive easing campaign. The median expectation [among economists] is for a 4% policy rate by year-end. Three more cuts over the last four decisions of the year isn’t a pace of cuts we would characterize as gradual and isn’t as likely to materialize barring a more material slowdown in the economy.
Andrew Grantham, senior economist, CIBC Capital Markets
One interest rate cut isn’t going to do much to ease the pressure households are facing as mortgages come up for renewal, and as a result we think that the Bank of Canada will need to reduce interest rates further and by more than financial markets are expecting in order to accelerate growth within the economy. We forecast three more cuts before the end of the year, with the policy rate finishing 2024 at 4.0%.
Royce Mendes, managing director and head of macro strategy, Desjardins Securities
Make no mistake, monetary policy is still exerting downward pressure on the economy and inflation, just a little less than it was yesterday. ... With challenges on the horizon and monetary policy only working with a lag, today’s 25bp rate reduction is consistent with a risk-management approach.
As expected, the Bank of Canada will continue to operate its quantitative tightening program in the background. In that way, central bankers continue to tighten financial conditions by increasing the supply of bonds held by the private sector, even as they worked to ease conditions via today’s rate reduction. The two policies will operate differently, but it does suggest that today’s rate cut won’t have as much impact on broad financial conditions as it might have otherwise.
Officials unequivocally stated that if inflation continues to ease, it’s reasonable to expect further cuts. That’s more explicit guidance than we had anticipated. As a result, we have increasing confidence that the Bank of Canada will move again in July. Even with consistent 25bps moves, this cutting cycle will be more gradual than previous iterations. It will also be less pronounced, should the economy avoid a hard landing.
The rate decision today is consistent with our view that policymakers want to get ahead of the coming mortgage renewal wall in 2025. As we’ve said, lower interest rates are the closest thing to a silver bullet for managing the renewals. A cooler US economy and a planned slowdown in population growth reinforce the need to get rates down to roughly 3.50% by the middle of next year.
Stephen Brown, deputy chief North America economist, Capital Economics
Today’s interest rate cut from the Bank of Canada will be the first of many, and the dovish tone of the accompanying communications suggests that another rate cut in July is already nailed on. For now, our forecast is that there will be three more 25 bp cuts this year, implying that the Bank will pause at one of its meetings, but if anything the odds seem to favour cuts at every meeting.
Although we suggested last week that caution would prevail, the decision to cut the policy rate by 25 bp, to 4.75%, seemed more likely following the weaker-than-expected first-quarter GDP data. The statement shrugged off the solid 3% annualised rise in consumption and simply noted that overall GDP growth was slower than expected, consistent with the idea that excess supply continues to accrue. The most striking thing about the statement is what it did not say, which was any reference to taking a cautious or gradual approach to policy loosening, instead simply noting that “risks to the inflation outlook remain”. In the accompanying press conference opening statement, Governor Tiff Macklem notes that “it is reasonable to expect further cuts to our policy interest rate”, even if the Bank is “taking our interest rate decisions one meeting at a time”.
In short, absent a big upside surprise to CPI in the next two releases before the late July policy meeting, the Bank will cut again next month. Our view remains that the Bank will cut the policy rate to 4.0% this year, lower than the 4.3% year-end rate implied by markets ahead of the meeting, with further loosening to come in 2025.
Douglas Porter, chief economist, BMO Capital Markets
The overall tone was constructive for further cuts, and frankly a bit more dovish than we would have expected, but still with a healthy dose of caution. The Bank is clearly impressed with the broad moderation of underlying inflation in 2024, and plainly states that policy does not need to be so restrictive any longer, but is also obviously wary about moving too quickly.
The key message from today is that they are going to take this on a meeting-by-meeting basis, so every CPI report matters, as does every GDP and jobless rate release, to a lesser extent. We have been pencilling in rate cuts every other meeting for now as a base case, but—like the Bank—that call is data dependent. There are two CPI (and jobs) reports prior to the July 24 decision; if the inflation reports mimic the very mild results seen so far this year, a cut is very much on the table for that decision as well.
For the economy, one 25 bp move, which had mostly been priced in, is not going to make a big impact all by itself. However, it will give at least a small bump to sentiment among borrowers, and brighten the mood in what has been a remarkably quiet housing market. As rates continue to gradually recede in coming quarters, the weight will be lifted off the struggling household sector, likely setting the stage for a modest improvement in growth in the year ahead.
Bottom Line: The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy. This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means. The Bank’s tone is a bit more dovish than expected, but each and every cut this year will require evidence that inflation is calming.
James Orlando, director and senior economist, TD Bank
We believe that the path forward for the BoC is going to be slow. It has acknowledged that the economy doesn’t need such high interest rates any longer. At the same time, it will proceed cautiously. It must ensure that inflationary pressures don’t rebound like they have in the U.S. in recent months. It also doesn’t want to reignite the housing market, where prospective buyers have been waiting for greater interest rate certainty. We expect the BoC is on a cut-pause-cut path, with the next cut likely occurring in September. This outlook will cause the BoC to diverge significantly from the Fed, which is likely to put greater pressure on the loonie over the coming months.
Claire Fan, economist, Royal Bank of Canada
To be sure, interest rates themselves are still high – and will still be at levels the BoC views as ‘restrictive’ by the end of this year even if our expected 100 bps worth of cuts materialize. Still, the move itself signifies confidence among policymakers that the most likely path for future inflation in Canada is down. The BoC will get two additional monthly inflation and labour market reports, as well as the second quarter business and consumer surveys before the next scheduled policy decision in July. Those should all offer more clues on a few key pressures points that the BoC highlighted including housing, wage growth and inflation itself. Our own base case assumes another 25 basis point cut in July.
David Rosenberg, founder of Rosenberg Research
Well, the Bank of Canada took its head out of the sand and did the right thing, cutting the policy rate by 25 basis points to 4.75%. The first easing in over four years. And there may also be a hidden message of a tapering in QT ahead as it shifted the language on this file to “continuing its policy of balance sheet normalization” from “continuing its policy of quantitative tightening” six weeks ago. ...
It was encouraging to see the Bank continue to emphasize the widening gap between demand and supply — there was less of this than was the case at the prior meeting, but the message was clear, and it is disinflationary. ...
The Bank is not done, either, and it matters not what the Fed does — back in the mid-to-late 1990s, the Bank of Canada, under a similar set of divergences with the U.S. economy, cut rates as much as -200 basis points below the Fed funds rate. And the BoC back then had no trouble with the Canadian dollar approaching C$1.40, either (for all the talk about how this should emerge as a worry for the central bank). The Bank of Canada does not have a mandate that includes what is happening south of the border. It has to carry out a domestic policy based purely on what is appropriate for Canada (the U.S. is receiving a far larger dose of fiscal stimulus and adjusts to higher interest rates with far longer lags — there is no comparison).
Tu Nguyen, economist with assurance, tax & consultancy firm RSM Canada
Given the Bank’s dovish statement that acknowledges monetary policy’s sizeable progress on inflation, another rate cut is in the book for July. As long as inflation continues its downward trend, we expect a total of three more rate cuts, bringing the policy rate to 4% by the end of 2024.
At 4.75%, the policy rate remains more than sufficiently restrictive. ... While a single rate cut will not revive the economy overnight, it signals to consumers and businesses the beginning of a gradual and orderly rate cut cycle that will unfold over the next year and a half. Recovery can begin now and hit full force in 2025.
The divergence from the Federal Reserve will cause the Canadian dollar to weaken, but the effect will be temporary until the Fed begins their own rate cut cycle, and it will be worthwhile to help the economy get going again.
CPA Canada chief economist David-Alexandre Brassard
The economic resilience to higher interest rates was due to the population growing much faster than anticipated rather than a bettering of economic performance. In Q1 of 2024, economic growth fell short of forecasts. GDP per capita keeps dropping, along with most per capita economic indicators: numbers of jobs, retail sales, household consumption, etc. ...
I’m glad to see the Bank of Canada implement its first interest rate cut. There was no need to wait for an additional month to further confirm what we already know: inflation is coming back down and interest rates are seriously restricting economic growth. This should give a little breathing room to the economy, but most importantly, it signals that the BOC has changed its tune. As for the coming months, the impacts of this cut should not be substantial, and we might very well see slowing growth if population growth slows down.
Bryan Yu, chief economist, Central 1 Credit Union
We expect that June’s cut will be the first of many over the coming 18 months. The Canadian economy faces further headwinds from the mortgage renewal cycle and higher payments facing many homeowners. Real interest rates are deeply in restrictive territory which will temper activity, and in our view Canada’s inflation problem is in the rear-view mirror. The Bank will continue to cut towards the neutral rate to limit unnecessary damage to the economy, but this will take time.
We expect the Bank to cut a total of four times this year, with a pause at the September meeting to assess the impacts of reductions on sectors like the housing market. The timing and depth of the cuts will also depend in part on the US Fed rate decisions. A delay in rate cuts in the U.S. could slow the pace of Bank cuts. While the Bank and Fed rates can diverge, there are limits, and the Bank will assess closely the impact on the exchange and potential import price inflation.
Philip Petursson, chief investment strategist, IG Wealth Management
Overall, the statement was a definitive dovish shift. This is an acknowledgement of the changing conditions of the Canadian economy that bordered on recession in the back half of 2023 and now supports further easing. Despite the token comments to inflation risks it would be hard to justify a pivot away from easing – in other words, more cuts should follow.
While the commencement of the easing cycle is generally good news for the Canadian economy and Canadians, one cut is a long way away from stimulating an otherwise lacklustre economy. Similar to the impact of interest rate increases that can take upwards of 6 to 18 months to work their way through an economy, interest rate cuts will also take time. Today’s cut does little to ease the impact on Canadians renewing their mortgage in a rate environment that remains much higher than where we were 5 years ago. Nonetheless, the signal is a positive one.
The more immediate consequence to the rate cut and messaging that followed is with the Canadian dollar against the US dollar. With the BoC in easing mode and uncertainty around the timing of the FOMC’s first cut, the loonie is, and will be facing further downward pressure. Our forecast is for the BoC to cut by 50 bps more than the Fed through 2024. If correct, that puts the loonie at risk of falling to a range of C$1.39-1.42 (US$0.72-0.70). The BoC will have to walk a careful line here between normalizing interest rates in support of the Canadian economy, but not going too far such that the unintended consequence is a much weaker loonie.
Dustin Reid, chief fixed income strategist at Mackenzie Investments
With two domestic CPI reports, employment reports and the BoC’s Business Outlook Survey all due before the next BoC policy meeting on July 24th, the Bank will have plenty of additional data to chew through if it opts to cut rates at back-to-back meetings. Additionally, with July’s meeting serving as the next forecast round, if the BoC’s models suggest that the output gap is expected to continue further progressing into excess supply territory, and the inflation outlook as a consequence continues to move lower, the Bank would be in a solid position to ease rates again at its next meeting.
Our view heading into today’s meeting was the BoC would likely cut rates by 25 basis points at two of the next three meetings in June, July and September, with June and July penciled in. Given what we learned today, we see no reason to change that view.
Arlene Kish, director, Canadian Economics, S&P Global Market Intelligence:
The Bank of Canada’s decision is warranted given the state of the economy and the general slowing of inflation, especially as the central bank highlighted its confidence in previous policy actions. There is no need to be patient. A less restrictive monetary policy environment should help bring the economy closer to potential as inflation slows sustainably to the 2% pace.
S&P Global Market Intelligence expects two more 25-basis point interest rate cuts this year, in July and October, followed by 5 cuts in 2025, putting the overnight rate at 3.00% by yearend. This forecasted policy easing is slower and smaller than the aggressive and rapid policy tightening during the pandemic.
Simon Harvey, head of FX analysis, Monex Canada (foreign exchange firm)
While BoC policymakers could have found reason to hold rates, against its previous guidance, on the basis that Q1 consumption growth was strong at an annualised rate of 3%, and April’s jobs report suggested this is filtering through into stronger employment demand, this would have been a mistake. Underlying economic momentum has remained weak following a strong expansion in January and February, and while April’s flash GDP number suggested the economy picked up momentum at the start of the second quarter, there is little sign that this is disrupting the overall trend of disinflation. This was pinpointed by Governor Macklem today, who framed the increase in consumption as merely in line with overall population growth, rather than the contraction in per capita consumption visible throughout the middle months of 2023. Moreover, the Governor noted that this is having little bearing on the overall path of inflation, with all measures now back within the Bank’s tolerance range, underlying momentum suggesting further disinflation progress is likely, and the fact that the economy is now operating in better balance. Should this remain visible within the two upcoming inflation reports before July, back-to-back rate cuts are a reasonable assumption according to Governor Macklem. We are somewhat more sceptical and expect the Bank to display caution around cutting too aggressively given risks of an excessive easing in financial conditions prior to the first cuts from the Fed; a stance that has been adopted by both the Swiss National Bank and the Swedish Riksbank, the two G10 central banks to cut before the BoC. Instead, we suspect the Bank will want to cut rates at every other meeting until the fourth quarter, leaving them to cut only twice before the Fed embarks on its first reduction on September 18th, as per our base case. ...
Rachel Siu, Head of Canadian Fixed Income Strategy, Portfolio Management Group, BlackRock
We believe the path for future rate cuts from here will be gradual and continue to be data-dependent. With other major developed market central banks poised to start cutting interest rates, including the European Central Bank expected tomorrow, investors can take advantage of the market opportunity across fixed income. Yields remain compelling and offer higher income today than 20 years ago. With the time of elevated cash rates likely drawing to a close, investors may want to re-evaluate portfolios and allocate back into bonds. Fixed income, particularly core bonds, have historically delivered strong performance following the first central bank cut.