Today (June 5) the Bank of Canada (BoC) became the first G7 central bank to cut its policy rate, with its policy-setting Governing Council deciding at today’s meeting to reduce the overnight interest rate target by 25 basis points to 4.75%. The move was largely expected by markets, but not fully priced in ahead of the decision (roughly 80% implied probability based on overnight index swaps with some hedging that the BoC would wait until July’s meeting, which includes updated forecasts in the Monetary Policy Report1), so Canadian market interest rates are lower post-release and the loonie is softer versus the US dollar.
The communication from the BoC today (which includes a press conference2 and policy decision statement3; the latter reproduced below for ease of reference) indicates that the move, following six straight meetings of keeping policy steady, comes as a result of the “considerable progress” made to “restore price stability” for Canadians over the last year and recent trends helping policymakers gain confidence that inflation will continue to move closer to target. Given that the BoC expressly does not want “monetary policy to be more restrictive than it needs to be to get inflation back to target”, decision-makers “agreed that monetary policy no longer needs to be as restrictive.”
Looking forward, BoC Governor Tiff Macklem stated that “it is reasonable to expect further cuts to our policy interest rate” should inflation continue to cooperate — though this easing cycle is likely to be considerable more protracted than the rate slashing at the onset of the pandemic in March 2020, with Macklem cautioning that “if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made” and that the BoC is “taking our interest rate decisions one meeting at a time.”
As it stands, the market is currently pricing about two more 25bps cuts by year-end (which seems reasonable, though today’s overt dovishness may suggest a skew in favour of a little more) and expecting policy rates to remain above the Bank’s estimated “neutral” rate for the foreseeable future (the April Monetary Policy Report4 estimated the range for the nominal neutral interest rate to be 2.25% to 3.25% with a 2.75% midpoint) — so this implies that policy is certainly on the path toward “less restrictive” but there is no anticipation for a return to the “easy” spectrum of the dial any time soon.
Bank of Canada overnight policy rate
(percent)
Dashed line represents overnight index swap (OIS)-implied policy rate as at June 5, 2024; shaded regions represent periods of US recession; source: Guardian Capital based on data from Bloomberg to June 5, 2024
With that said, though, today’s decision marks a turning point in what was historically aggressive and synchronized global monetary tightening cycle — more cuts from more central banks are expected in the months ahead, with the European Central Bank anticipated to follow the Bank of Canada’s lead tomorrow.
Written by: David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP) and provides macro-economic guidance to GCLP and its affiliates—Alta Capital Management LLC and GuardCap Asset Management Limited.
FOR IMMEDIATE RELEASE
Media Relations
Ottawa, Ontario
June 5, 2024
The Bank of Canada today reduced its target for the overnight rate to 4¾%, with the Bank Rate at 5% and the deposit rate at 4¾%. The Bank is continuing its policy of balance sheet normalization.
The global economy grew by about 3% in the first quarter of 2024, broadly in line with the Bank’s April Monetary Policy Report (MPR) projection. In the United States, the economy expanded more slowly than was expected, as weakness in exports and inventories weighed on activity. Growth in private domestic demand remained strong but eased. In the euro area, activity picked up in the first quarter of 2024. China’s economy was also stronger in the first quarter, buoyed by exports and industrial production, although domestic demand remained weak. Inflation in most advanced economies continues to ease, although progress towards price stability is bumpy and is proceeding at different speeds across regions. Oil prices have averaged close to the MPR assumptions, and financial conditions are little changed since April.
In Canada, economic growth resumed in the first quarter of 2024 after stalling in the second half of last year. At 1.7%, first-quarter GDP growth was slower than forecast in the MPR. Weaker inventory investment dampened activity. 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.
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. However, shelter price inflation remains high.
With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.
The next scheduled date for announcing the overnight rate target is July 24, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.
1 Bank of Canada, Policy interest rate, Core functions, Monetary policy, https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/
2 Bank of Canada, Monetary Policy Decision Press Conference Opening Statement, Press, Speeches and appearances, Tiff Macklem, Ottawa, Ontario, June 5, 2024, https://www.bankofcanada.ca/2024/06/opening-statement-2024-06-05/
3 Bank of Canada, Bank of Canada reduces policy rate by 25 basis points, Press, Press Releases, June 5, 2024, https://www.bankofcanada.ca/2024/06/fad-press-release-2024-06-05/
4 Bank of Canada, Monetary Policy Report, April 2024, April 10, 2024, https://www.bankofcanada.ca/wp-content/uploads/2024/04/mpr-2024-04-10.pdf
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