The Bank of Canada expects it will be able to begin cutting interest rates sometime this year, but officials are split on timing, a newly released summary of deliberations shows.Sean Kilpatrick/The Canadian Press
The Bank of Canada’s governing council believes it will be appropriate to cut interest rates this year if the economy develops as expected, although there is disagreement among members on the likely timeline, according to a summary of discussions that took place ahead of the latest rate decision.
Governor Tiff Macklem and his deputies kept the policy rate steady at 5 per cent on March 6, the fifth consecutive hold since last summer.
While they remain concerned about stubborn inflation and the risk of easing monetary policy too soon, Canada’s top central bankers are now openly discussing the timing of rate cuts – albeit with reservations.
“Members agreed that if the economy evolves in line with the Bank’s projection, the conditions for rate cuts should materialize over the course of this year,” said the summary of deliberations, published Wednesday.
“However, there was some diversity of views among Governing Council members about when there would likely be enough evidence that these conditions were in place, and how to weight the risks to the outlook.”
The argument for lowering interest rates was bolstered on Tuesday, when Statistics Canada reported a surprising drop in inflation in February. The consumer price index rose at an annual rate of 2.8 per cent, the second consecutive month that inflation has been back within the Bank of Canada’s 1-per-cent-to-3-per-cent target range.
After that data, Bay Street analysts and traders upped their bets that the central bank will begin lowering interest rates in June, although an earlier cut in April or a later first cut in July are possible.
In some ways the Summary of Deliberations is already stale, given the new inflation data. But it does contain important insights into how central bankers are thinking about the housing market, the correct way of measuring underlying inflation and wage pressures.
In particular, policy makers are nervous about a rebound in real estate, with would-be buyers rushing back into the market in anticipation of rate cuts.
“While house prices continued to fall in January, recent strength in resales could translate into a pickup in house prices and stoke shelter price inflation,” the summary said.
Shelter inflation, which is the biggest driver of overall CPI inflation, is a challenge for the central bank. A big part of it is tied to rising mortgage interest costs, which are the direct result of the bank’s past interest rate hikes. Bank officials have also said that rising rents stem from an imbalance between housing supply and population growth that can’t be fixed by changing interest rates.
That’s led some analysts to suggest the bank should look past shelter inflation when setting interest rates. But the bank does not seem especially keen on this argument.
“Members agreed that if mortgage interest costs were the only component holding up inflation, there could be some capacity to look through them, so as not to unduly restrain economic activity to get headline inflation back to 2 per cent. However, this was not the current situation,” the summary said.
“Most components of shelter inflation, such as rent and expenses related to home ownership (including insurance, taxes and repairs), were still rising significantly in January.”
A second key insight from the document is that bank officials are taking an expansive view of “underlying inflation.”
For months, they’ve said they want to see a sustained drop in underlying inflation before cutting rates, although it has never been clear what metrics they are talking about.
The summary clarified that they are not just looking at CPI-trim and CPI-median, their two preferred measures of core inflation. They are also looking at other measures like CPI excluding food and energy, as well as “the distribution of inflation rates across components of the CPI basket.”
Alongside measures of underlying inflation, Mr. Macklem and his team are watching other indicators, such as the overall balance between supply and demand in the economy, corporate pricing behaviour, inflation expectations and wage growth.
While most of these are trending in the right direction, the pace of wage growth has remained higher than the bank thinks is compatible with 2 per cent inflation. These labour market dynamics, however, are starting to change.
“Governing Council members noted that recent data were beginning to show signs of easing wage pressures,” the summary said, noting that data from Statistics Canada’s Survey of Employment, Payrolls and Hours and National Accounts were lower than in the Labour Force Survey.
The bank’s next interest rate decision is on April 10.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
