–BoC Repeats: Will Take Policy Decisions One Meeting at a Time
–Governor Macklem: We Are Now Equally Concerned About Inflation Coming in Higher or Lower Than Expected
–Macklem: Now Our Focus Is To Maintain Low, Stable Inflation; Need To Keep Inflation Where It Is
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday lowered its policy interest rate — the target for overnight lending rates — by 50 basis points to 3.75%, as widely expected, to help ease the pain of its earlier rapid credit tightening on households and businesses after conducting three 25-basis point cuts since June, when it delivered its first rate reduction in more than four years.
The bank left its door open for more interest rates cuts so that the cumulative effects of past rate hikes do no chill economic activity more than necessary.
The bank also decided to continue its policy of quantitative tightening to trim the bank’s balance sheet to a normal level. The process is likely to end sometime next year when the bank will resume normal purchases of government bonds.
“With inflation now back around the 2% target, Governing Council decided to reduce the policy rate by 50 basis points (0.5 percentage point) to support economic growth and keep inflation close to the middle of the 1% to 3% range,” the bank said.
“If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further,” the bank said.
“However, the timing and pace of further reductions in the policy rate will be guided by incoming information and our assessment of its implications for the inflation outlook,” it said, repeating its recent statement. “We will take decisions one meeting at a time.”
In his opening remarks at a news conference, Governor Macklem said, “We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target.”
In the past few months, inflation has come down significantly from 2.7% in June to 1.6% in September and recent indicators suggest it will be around 2% in October, he said, adding that “price pressures are no longer broad-based, and both our measures of core inflation are now under 2.5%.”
“Now our focus is to maintain low, stable inflation,” Macklem said. “We need to stick the landing, keeping inflation where it is.”
“Overall, we view the risks around our inflation forecast as reasonably balanced,” the governor said. “With inflation back to 2%, we are now equally concerned about inflation coming in higher or lower than expected.”
Looking ahead, the governor said, “If the economy evolves broadly in line with this forecast, we anticipate cutting our policy rate further to support demand and keep inflation on target.”
“The timing and pace of further interest rate cuts will depend on incoming information and our assessment of its implications for the inflation outlook,” he said. “We will take our monetary policy decisions one at a time.”
He stressed during the news conference that the bank’s policymakers will “take our December decision in December” after monitoring GDP, employment and CPI among other indicators while watching various risks closely.
Lower inflation is partly due to lower global oil prices, particularly gasoline prices, but looking beyond fluctuations in energy costs, core inflation measures have also come down, the governor said, adding that shelter inflation is still elevated but is likely to ease gradually because excess supply in economy is helping lower prices.
Asked if bank officials might have underestimated underlying weakness in the economy as inflation in Canada has fallen to around the bank’s 2% target earlier expected, the governor replied, “We are pleased to see that inflation has come back (down) a little quicker. Reflecting that, we took a 50-basis point cut today. That should help bring supply and demand back into balance in the economy.”
Macklem said bank officials have been communicating their policy stance in a transparent manner despite the fact that the Bank of Canada does not provide its policymakers’ projections on future interest rate levels as the U.S. Federal Reserves does.
“We actually have been very clear about the direction of our policy rate,” he said. “Since we cut in June, we’ve been indicating that if things continue to evolve broadly in line with our forecast, we anticipate cutting the policy rate further, and that’s what we’ve been doing.”
When it comes to lowering rates by either 25 or 50 basis points, that will depend on the economic climate at the time of each policy meeting, he said. “We are discovering how the economy evolves like everybody else.”
Economists generally expect the bank to continue cutting interest rates to eventually bring the policy rate to around 2.5%, which is considered neutral to economic activity. The BoC’s next rate announcements are scheduled for Dec. 11, Jan. 29, March 12, April 16 and June 4.
Douglas Porter, chief economist at BMO Financial Group, said in a report that judging from the bank’s “mild tone,” it is likely to lower its policy rate by 25 basis points at each meeting “unless growth and/or inflation surprise again to the downside.”
“We certainly can’t rule that out, and our calls on both GDP and CPI are slightly lighter than the bank’s, so there is still a risk of another 50 basis point step at some point,” Porter projected. “For now, we will maintain our call of a series of five more 25 basis point trims, taking the overnight rate to 2.5% by next June, at the low end of the bank’s 2.25% to 3.25% range for neutral.”
At its June meeting, the bank conducted its first interest rate cut since March 2020 but also left monetary policy “restrictive” to economic activity. The action differs from three emergency rate reductions, from 1.75% to 0.25%, at the early phase of the pandemic when demand plunged across the world.
The bank is in the process of gradually unwinding the 10 rate hikes totaling 475 basis points that it conducted between March 2022 and July 2023, taking the overnight rate to a 22-year high of 5% from its record low of 0.25%.
Canadians have experienced a lot in the past few years: high inflation and high interest rates, the governor said. The pandemic has cast a long shadow as it triggered a plunge in global demand and caused a supply chain breakdown as demand re-emerged. But Canada is coming out of it and inflation has now eased to around the bank’s 2% target.
“I think the inflation climate is much more back to normal than it was,” he said. “But that doesn’t mean everything is normal. There is still some fallout. Having come through this period of high inflation, that has impacted Canadians.” The governor was asked whether households and businesses have become more sensitive to and are accepting an uptick in costs that may be caused by signs of another supply chain shock.
“Canadians are still living with higher prices at a grocery store in particular, and they are living with higher rents,” he noted. “But with inflation now low and with our commitment to keep it low, we are getting back to a more normal situation. I think there is going to be some relief for Canadians, (although) it’s going to take some time.”
Macklem said bank officials still have some work to do. “We got back to low. Now we need to deliver on stable.”
In its quarterly Monetary Policy Report also released on Wednesday, the bank noted that consumer inflation has eased to around its 2% target, reflecting both lower energy prices and weaker underlying inflationary pressures. “Overall, inflation is near target, but the distribution of inflation rates across CPI components remains wider than usual,” it said.
“Over the projection horizon, inflation is expected to remain close to the 2% target,” the bank said. “Core inflation is forecast to decline gradually. There are both upside and downside risks to the Bank of Canada’s outlook for inflation, and the bank is equally concerned with inflation rising above the target or falling below it.”
“The Canadian economy continues to be in excess supply,” the bank said, repeating its recent assessment. “The labour market has softened, with increases in unemployment concentrated among newcomers and youth. Wage growth remains elevated relative to productivity.”
The bank expects economic growth to pick up gradually and average 2.25% over 2025 and 2026, counting on solid consumer spending and business investment backed by “decreases in interest rates.” This forecast reflects the net effect of slower increases in population and rising growth in consumption per person.
The BoC forecast that Canada’s GDP will grow 2.1% at an annualized pace in the July-September quarter (data due on Nov. 29), up from 1.5% growth projected in July, while revising down its forecast for GDP growth for October-December to 1.5% from 2.8%. Its first estimate for January-March GDP is a 2.0% rise.
The bank still expects consumer inflation for 2024 to be an above-target 2.5%, but slightly lower than 2.6% projected in July. The consumer price index rose 3.9% in 2023 after soaring 6.8% in 2022 and rising 3.4% in 2021.
As for the CPI in 2025, the bank forecast the annual inflation rate will remain just above the target, at 2.2%, but lower than 2.4% projected in July. The bank’s CPI estimate for 2026 is unchanged at 2.0%.