Bank of Canada monetary easing door slightly ajar

Summary

The Bank of Canada (BoC) held its policy interest rate steady at 5.00% at today's monetary policy announcement, an outcome that was widely expected. However, the accompanying statement pointed to the potential for lower policy interest rates in the months ahead. BoC Governor Macklem said “we are seeing what we need to see” to lower policy interest rates, but that “we need to see it for longer to be confident that progress toward price stability will be sustained.” Macklem also said a June rate cut was within the realm of possibilities. Meanwhile, the BoC also lowered its CPI inflation forecasts, even as it upgraded its GDP growth forecasts.

While the outcome of the next monetary policy meeting in June is clearly data dependent, so long as core inflation remains contained and labor market trends subdued, we suspect that may be enough for the BoC to deliver an initial 25 bps policy rate cut at that meeting. We also forecast 25 bps rate cuts in July, September and October, for a cumulative 100 bps of rate reduction in 2024, which would see the policy rate end this year at 4.00%. Overall, we think the BoC will ultimately cut rates by more this year than currently expected by market participants over the rest of 2024. Moreover, with Bank of Canada easing this year likely to outpace that of the Federal Reserve, there is also potential for some further Canadian dollar weakness in the months ahead.

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