Monetary Policy & Inflation | Rates
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Summary
- Governor Macklem executed a dovish hold during yesterday’s BoC meeting.
- Three themes emerged during the presser:
- Uncertainty is weighing on Canada’s economy.
- Inflation remains too high.
- A cut and a pause were discussed, with inflation data leading to a pause.
Market Implications
- We believe the BoC will next cut its policy rate in July.
BoC Executes a Dovish Hold
The BoC kept rates unchanged yesterday as expected. However, the overall meeting leaned dovish. Here are our three takeaways:
1. Outlook remains cautious. When talking about the economy, Governor Macklem frequently reiterated that uncertainty remains high, and the labour market weakened in April. Moreover, he quickly brushed aside Q1’s robust GDP growth to the ‘pull forward in exports’ instead, suggesting Q2 may be softer. For us the labour market remains ‘ground zero’, as further loosening materially increases risk of inflation undershoots.
2. Inflation (realised and anecdotal) drove the pause. Given the cautious outlook, why not cut? Macklem and Rogers provided three risks.
- First, the recent upside surprises in inflation may suggest the underlying trend is firmer than thought.
- Second, the impact of retaliatory tariffs is not yet in the data but is expected to appear in coming months.
- Third, businesses report they are facing higher costs related to finding alternative suppliers, while held inventories have risen.
The punchline: further cuts should materialise if inflation is contained in coming months.
3. Decision to hold was unclear. Within the statement, Macklem stated the Committee discussed various options. Moreover, he emphasised the impact prolonged uncertainty could have on the economy, suggesting further cuts ahead.
Our base case remains that the BoC will cut to 2.25%, with risk of deeper cuts to 2%. A looser labour market and a weaker US economy could drive this outcome. Therefore, we remain long CORZ5 but acknowledge the risks of this outcome have reduced since April.
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