June Bank of Canada Meeting

Christopher Bowlby - Jun 05, 2024
A Small Step Towards Easing, a Big Leap in G7 Central Bank Monetary Policy

The Bank of Canada cut interest rates by 0.25% to 4.75%, marking the first reduction in over four years, the first rate cut by Governor Macklem, and the first rate cut by a G7 central bank. This rate cut has been anticipated by financial markets for the last few weeks, and the key focus at today’s meeting was the overall messaging by the Bank on the forward path of interest rates.


Overall, the messaging from the meeting was more dovish than anticipated and constructive for further cuts throughout the remainder of 2024. The Bank of Canada remains cautious about easing off the brakes too quickly but is clearly confident that the broad moderation of inflation seen in 2024 will continue and that monetary policy does not need to be as restrictive.


As per the operating policy of Governor Macklem’s regime at the Bank of Canada, the bank continues to be data-dependent and will determine the path of rate cuts on a meeting-by-meeting basis. This continues the scrutiny on every CPI, GDP, and jobless rate report as they are released, with markets trying to interpret how cautious the Bank of Canada will be. The next Bank meeting will be on July 24th, and there will be two CPI and jobs reports prior to that meeting. As of now, our economists are pencilling in a rate cut every other meeting but leaving the door open for a second rate cut in quick succession in July if the mild results seen so far in 2024 continue.


Furthermore, in his opening statement, Governor Macklem suggested that the inflation data is not as broad-based, with the proportion of CPI components increasing faster than 3% now close to its historical average, and discussed the risks to their outlook. "We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made. Further progress in bringing down inflation is likely to be uneven and risks remain. Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected, or if wage growth remains high relative to productivity." (Emphasis BMO Economics).


While this rate cut is only 25 bps, it is quite significant as it marks the official turning point of the last two years of tightening and restrictive monetary policy. The Bank of Canada continues to lead other G7 nations by being the first to cut. While today’s move is likely to be the first in a series of cuts, we do not believe that it is going to be a straightforward march back to the pre-pandemic 2.5% level. We continue the trend of being data-dependent, and the Bank has stated that moving forward, every rate cut will require evidence that inflation is normalizing back to their 2% long-term target.


Source: Bloomberg