Yahoo Finance June rate cut 'within the realm of possibilities,' says Macklem, as Bank of Canada holds rate at 5%
The Bank of Canada held its benchmark interest rate steady at 5 per cent on Wednesday, and while it said that a June cut is "within the realm of possibilities" the central bank needs to see evidence that progress on inflation is sustained.
"Yes, it's within the realm of possibilities," Governor Tiff Macklem said when asked whether the door has been opened to a rate cut in June. He noted that inflation has come down, as has the central bank's closely monitored measures of core inflation, and that while some things such as shelter prices are still supporting inflation "things are moving in the right direction."
"We're encouraged by that progress," he said.
"We need to see that progress continue and if things move in line broadly with the outlook that we published today, we will be becoming more confident that we're clearly on the path to 2 per cent inflation and it will be appropriate to cut our interest rate."
Analysts surveyed by Reuters had widely expected the central bank to hold its key overnight rate at 5 per cent for the sixth consecutive meeting. But recent data, including an unexpected slowdown in inflation and a stall in the jobs market, had increased bets that the central bank will come off the sidelines and begin to cut rates in June.
Macklem said in a prepared statement on Wednesday that the central bank expects core inflation to continue to ease gradually, but with gas prices rising, CPI is likely to remain around 3 per cent in the coming months.
"What do we need to see to be convinced it’s time to cut? The short answer is we are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained," Macklem said.
"The further decline we’ve seen in core inflation is very recent. We need to be assured this is not just a temporary dip."
In its quarterly Monetary Policy Report, also released on Wednesday, the bank said it expects CPI to be an average of 2.9 per cent in the second quarter and fall below 2.5 per cent in the second half of the year before reaching 2 per cent in 2025. The bank also hiked its growth forecast for 2024 on the back of strong immigration flows and increased household spending.
Will the Bank of Canada cut in June?
BMO Capital Markets Canadian rates and macro strategist Benjamin Reitzes wrote in a note to clients that the central bank's statement on Wednesday was "mildly more dovish."
"However, policymakers need more evidence that this trend will continue before they're willing to start easing," Reitzes wrote.
"While June is still on the table, the coming CPI reports will need to be at least as good as what we saw in January and February."
Traders dialed back their expectations for the timing of the next rate cut, according to Reuters. Before the announcement they saw an 84 per cent chance of it coming in June but that fell to around 40 per cent.
"The BoC has got what it wanted, and now it wants to see more ... They perhaps did not deliver on the more dovish expectations that some had expected, but this doesn’t necessarily shut the door on a June cut," Ballinger Group FX markets analyst Kyle Chapman said in a statement.
"We have two more CPI prints to go before then, and a repeat of the 2.8 per cent figure should be enough for them to pull the trigger. And with jobs growth in reverse and unemployment surging, it seems likely that this is what we will get.”
Desjardins managing director and head of macro strategy Royce Mendes wrote in a note on Wednesday that the latest releases from the central bank "paint a picture of policymakers who are nearly ready to begin a rate cutting cycle."
"As a result, we are retaining our call that the first rate cut happens in June," Mendes wrote.
"The only fly in the ointment today comes from outside Canada, with the hotter-than-anticipated U.S. inflation numbers creating some concern that some price pressures could spillover the border."
TD Economics senior economist James Orlando wrote that it expects the Bank of Canada to begin cutting rates in July.
"Even though inflation has moved within the BoC's 1 per cent to 3 per cent target range over the last few months, markets have become more cautious on the timing of cuts," Orlando wrote.
"While some of this is coming from the inflation warning in recent U.S. CPI prints, strong Canadian economic growth to start 2024 has been the main driver ... Should economic growth weaken further and inflation remain on its current trajectory, we could see the BoC readying markets for the cuts in short order."
With files from Reuters
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
Download the Yahoo Finance app, available for Apple and Android.
