The Bank of Canada became the first G7 nation central bank to follow through on predictions and lower borrowing costs, signalling a desire to do more in the months ahead.
The governing council decided to reduce its target for the overnight rate to 4.75% from 5.00%. The accompanying statement said the bank would continue its policy of balance sheet normalisation.
Advancing the more dovish narrative, the communique noted that economic conditions had increased the council’s confidence that inflation would continue to move towards its 2% target.
At the press conference, Governor Tiff Macklem went further, suggesting additional easing was in the pipeline: “If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate.”
Macklem did caveat this by adding that further cuts would be conditional and the pace gradual. Answering questions from journalists, the bank chief said, “The timing of further cuts depends on data […] we are taking our interest rate decisions one meeting at a time.”
More cuts priced in
Despite the widely expected cut, market reaction saw Canadian bond yields fall across the curve, following the announcement. Two-year CGB yields breached 4% in the immediate aftermath.
TD Securities Robert Both posited that “The bank's desire for further easing of inflation pressures sets a relatively low threshold to future cuts, despite its desire to keep all options on the table, and history shows the bank has a tendency to move twice in a row.”
Governor Macklem highlighted the four indicators in particular rate setters would view before deciding on the next move:
-CPI inflation has eased from 3.4% in December to 2.7% in April
-our preferred measures of core inflation have come down from about 3.5% last December to about 2.75% in April
-the 3-month rates of core inflation slowed from about 3.5% in December to under 2% in March and April
-the proportion of CPI components increasing faster than 3% is now close to its historical average, suggesting price increases are no longer unusually broad-based
“A gradual easing cycle is both sensible and likely, but we'd simply note that it would be unusual relative to history for the BoC to follow up the first cut of a cycle with a pause,” Both proffered. “Cuts in June and July followed by a pause in September could very easily meet the Bank's criteria for a gradual easing cycle, and as such we look for another 25bp rate cut in July.”
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- Governing Council cuts rates by 25bps to 4.75%
- Governor Macklem signals more easing ahead
- Timing of further moves likely to be gradual
- Markets pricing at least two more moves this year
By Harry Daniels
LiveSquawk News
@HarryDaniels71
5 June 2024 | 15:30 GMT
The Bank of Canada became the first G7 nation central bank to follow through on predictions and lower borrowing costs, signalling a desire to do more in the months ahead.
The governing council decided to reduce its target for the overnight rate to 4.75% from 5.00%. The accompanying statement said the bank would continue its policy of balance sheet normalisation.
Advancing the more dovish narrative, the communique noted that economic conditions had increased the council’s confidence that inflation would continue to move towards its 2% target.
At the press conference, Governor Tiff Macklem went further, suggesting additional easing was in the pipeline: “If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate.”
Macklem did caveat this by adding that further cuts would be conditional and the pace gradual. Answering questions from journalists, the bank chief said, “The timing of further cuts depends on data […] we are taking our interest rate decisions one meeting at a time.”
Despite the widely expected cut, market reaction saw Canadian bond yields fall across the curve, following the announcement. Two-year CGB yields breached 4% in the immediate aftermath.
TD Securities Robert Both posited that “The bank's desire for further easing of inflation pressures sets a relatively low threshold to future cuts, despite its desire to keep all options on the table, and history shows the bank has a tendency to move twice in a row.”
Governor Macklem highlighted the four indicators in particular rate setters would view before deciding on the next move:
- CPI inflation has eased from 3.4% in December to 2.7% in April
- our preferred measures of core inflation have come down from about 3.5% last December to about 2.75% in April
- the 3-month rates of core inflation slowed from about 3.5% in December to under 2% in March and April
- the proportion of CPI components increasing faster than 3% is now close to its historical average, suggesting price increases are no longer unusually broad-based
“A gradual easing cycle is both sensible and likely, but we'd simply note that it would be unusual relative to history for the BoC to follow up the first cut of a cycle with a pause,” Both proffered. “Cuts in June and July followed by a pause in September could very easily meet the Bank's criteria for a gradual easing cycle, and as such we look for another 25bp rate cut in July.”