The Bank of Canada cut the overnight rate to 4.75% (from 5.0%), while stating that it will continue with Quantitative Tightening (QT).
The Bank spoke confidently about the economy, stating “economic growth resumed in the first quarter of 2024 after stalling in the second half of last year.” It highlighted that “consumption growth was solid at about 3%, and business investment and housing activity also increased. Labour market data show businesses continue to hire, although employment has been growing at a slower pace than the working-age population. Wage pressures remain but look to be moderating gradually. Overall, recent data suggest the economy is still operating in excess supply.”
On the inflation outlook, the BoC sounded encouraged, stating “CPI inflation eased further in April, to 2.7%. The Bank’s preferred measures of core inflation also slowed and three-month measures suggest continued downward momentum. Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average.”
On the future path of policy, the Bank revealed that “with continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive.”
Key Implications
Like that one neighbour who has let their yard become overgrown, the BoC has heard the complaints and decided to bring out its policy trimmers to cut rates. Even though the central bank hadn’t signaled an intention to cut ahead of today’s meeting, the recent softening in inflationary pressures was enough to convince it that now was the time. As our readers know, we have been arguing that the foundation for rate cuts has been in place for all of 2024. And while the BoC has waited longer than we would have hoped, today starts the process of lower interest rates for Canadians going forward.
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.
