Bank of Canada officials split on rate cut timing, but agree easing will be gradual

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Bank of Canada officials are split on when to start lowering interest rates, but agree the pace of cuts will likely be gradual when they do begin easing monetary policy.

A summary of the discussions that took place ahead of the April 10 rate decision show members of the bank’s governing council are becoming more confident that inflation is on a path back to the 2-per-cent target. That’s opened the door to interest rate cuts in the coming months.

However, some members of the six-person council, which is chaired by Governor Tiff Macklem, remain wary about cutting interest rates too soon, in light of a jump in domestic demand and robust growth in the United States. That suggests a rate cut at the bank’s next meeting on June 5 is not a sure thing.

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Financial markets put the odds of a June rate cut at around 45 per cent, according to Refinitiv data. That rises to 80 per cent for a rate cut in July.

While policy makers remain split on the appropriate timing of the first rate cut, there’s more consensus about the likely path of monetary policy through the remainder of the year.

“While there was a diversity of views about when conditions would likely warrant cutting the policy rate, they agreed that monetary policy easing would probably be gradual, given risks to the outlook and the slow path for returning inflation to target,” said the summary, published Wednesday.

This echoes earlier comments by Mr. Macklem, who warned that interest rates are unlikely to drop as quickly as they rose in 2022 and 2023, when the bank raised its policy interest rate by 4.75 percentage points in a little over a year to combat runaway inflation.

“Past rate-cutting cycles have often been fast and furious, with rapid easing required to offset a major shock to the economy,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients.

“This time policy makers are not yet faced with a recession and need to balance the risk that inflation heats back up or gets stuck at an elevated level as rates fall.”

The bank has kept its policy interest rate at a two-decade high of 5 per cent since last summer, with the aim of slowing economic growth and reducing upward pressure on prices. Now, however, the bank is approaching a pivot point.

Annual Consumer Price Index inflation has been below 3 per cent for the past three months, and core inflation measures that strip out the most volatile prices have all been trending lower.

The summary said that bank officials were “encouraged by the recent progress” on inflation, as well as a number of other measures they are using to gauge inflationary pressures. Businesses are reporting less inclination to raise prices rapidly, public expectations of inflation are falling, and wage pressures are showing some limited signs of easing.

The more dovish members of the governing council focused on this progress, the summary said: “Coupled with indicators that the economy was in excess supply and with a base case projection showing the output gap starting to close only next year, they felt there was a risk of keeping monetary policy more restrictive than needed.”

However, more hawkish members of the council suggested that the Canadian economy is in better shape than expected, which reduces the need to lower rates immediately. They focused instead on the risk of moving too soon.

“They felt more reassurance was needed to reduce the risk that the downward progress on core inflation would stall, and to avoid jeopardizing the progress made thus far,” the summary said.

The summary does not spell out where individual governing council members, including Mr. Macklem, stand in the debate.

There are still upside risks to inflation, including the likelihood that house prices will rise when the bank starts cutting rates, and that the conflict in the Middle East will push up oil prices.

There is one more Consumer Price Index report before the June rate decision. The bank expects the annual rate of inflation to “bounce around” 3 per cent in the coming months, before easing below 2.5 per cent in the fall.

“If we get a fourth straight subdued CPI report next month, it looks like the BoC will strongly consider cutting policy rates in June,” Benjamin Reitzes, director of Canadian rates and macro strategist at Bank of Montreal, said in a note to clients. “Beyond that, it’s clear that rate cuts will be gradual, and that the BoC is in no rush to get back to neutral.”