On Wednesday the BoC began its interest rate cut cycle, the BOC’s first cut in four years:
Canada is the first G7 country to cut rates.
More cuts are to come:
Snippet now from ScotiaBank, expecting another cut in July and 100bps of easing this year from 75bps previously
- Bank of Canada Governor Macklem is “setting a high bar against not cutting again in July”
- We think they will wish to deliver this 100bps in a straight line fashion until the October meeting
While Scotia make these forecasts, they aren’t happy, and see numerous points of concern for higher inflation ahead:
- Canada continues to face higher full-cycle inflation risk than the US and the BoC should be much more careful than the Governor sounded today
- There are several drivers of relative inflation risk
- Wage growth remains in excess of productivity in Canada by contrast to the US.
- Fiscal policy is still adding to growth and likely to add even more into an election year.
- Severe housing shortfalls are very likely to persist and maintain high upward pressure on shelter costs.
- The economy is outperforming the BoC’s expectations coming into the year with the consumer doing rather well.
On the CAD, “Green Light to Sell”
- Macklem sounded remarkably indifferent toward the currency. When asked about the currency and implications for importing inflation, he said:
“One of the ways monetary policy works is through the exchange rate. We don’t have a target for the exchange rate. We believe in flexible exchange rates. By being clear about our forecasts, markets have a very good idea of what’s on our mind which is going to be reflected in markets.”
I choked on “clear” in their forecasts considering he just cut when he said he wouldn’t, but the main point here is not to disagree with his comments on CAD but to view them as signalling he would tolerate a lot further currency weakness from here.
- That easily leaves open a 1.40-handled currency
