The Bank of Canada (BoC) is signalling its readiness to lower interest rates if the current trend in core inflation continues, according to new commentary from BMO.
Benjamin Reitzes, managing director, Canadian rates & macro strategist at BMO Capital Markets, said the BoC will want to see “‘sustained’ easing in core inflation” before making a decision on policy rate cuts.
“Since the April 10 policy meeting, March CPI came in soft, building on the inflation progress seen in the prior two months,” said Reitzes. “If we get a fourth straight subdued CPI report next month, it looks like the BoC will strongly consider cutting policy rates in June.”
This cautious outlook was made clear in the summary of deliberations from BoC’s April 10 policy rate meeting, which showed “mixed views” among the governing council.
Some members were wary of upside inflation risks spurred by stronger economic growth in the US and recent domestic improvements, as indicated by a more robust GDP growth forecast. Others noted the disinflationary impact of persistent excess supply, which is anticipated to extend into the next year.
Ultimately, the BoC has made it clear that “rate cuts will be gradual” as it remains focused on meeting inflation targets, according to Reitzes.
“The BoC is in no rush to get back to neutral,” he said.
Key points raised in BoC’s April 10 meeting
During the meeting, services inflation was identified as a “key area of concern” despite the overall improvement in inflation expectations. The BoC also discussed housing inflation, as it defended its exclusion of mortgage interest costs from its trim core measure over the past two years.
Another point of discussion was wage dynamics. While wage growth was said to be robust, it is anticipated to gradually ease in the coming quarters, reflecting the lagging nature of wages relative to labour market activities.
As for the domestic economy, members noted the impact of strong population growth contrasted against a loosening labour market.
CMP
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