The Bank of Canada (BoC) recently held its governing council meeting, during which it was agreed that any potential reductions in interest rates would likely be gradual. This decision aligns with the ongoing risks to the inflation outlook, as detailed in the minutes from the meeting published on Wednesday.
During their April 10 meeting, the council, which is comprised of six members, maintained the key interest rate at a near 23-year peak of 5%. The discussions highlighted a split among the members regarding the timing for any possible rate cuts. The consensus acknowledged that while diverse views exist on the timing, a cautious approach would be necessary due to the persistent inflation risks and the challenges of steering inflation back to the target rate.
Governor Tiff Macklem, in remarks last Friday, pointed out that although there are signs of inflation cooling, the bank would require more evidence of sustained progress before commencing rate reductions. The central bank has elevated rates by a total of 475 basis points over 16 months, pausing rate changes since last July. This aggressive strategy has reduced the inflation rate from a high of 8.1% in June 2022 to 2.9% in March. However, the BoC projects that it will not achieve its 2% inflation target until the end of 2025, with high shelter costs being a significant contributing factor.
The minutes also revealed that there has been steady progress in lowering the overall inflation rate and core inflation, which excludes more volatile price components. Some council members noted that the strong economic performance has lessened the risks of an overly restrictive monetary policy that could excessively slow the economy. However, they also emphasized the need for more assurances to mitigate the risk of stagnation in the progress on core inflation.
Conversely, other members highlighted the progress made in reducing inflation, suggesting a risk of maintaining an unnecessarily restrictive monetary policy.
The possibility of a rate cut as early as June was suggested by Governor Macklem on April 10, with financial markets considering it a 50/50 chance. Meanwhile, a 25 basis-point cut in July is fully anticipated.
The council also discussed broader economic factors, such as population growth and recent federal adjustments to non-permanent resident policies, which add complexity to the economic and inflationary outlook.