MNI BOC WATCH: Hold And Potential Cut If CPI And Growth Slow

The BOC held rates for a third meeting and said a reduction can be justified if the US trade war slows growth and inflation while officials stuck with economic scenarios instead of a forecast two days before Donald Trump's deadline for a deal with a status quo of avoiding recession and core inflation staying above 3% the rest of this year.

"If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate," the Bank said Wednesday. While that comment was promoted to the decision from the last meeting when it was in Governor Tiff Macklem's press statement, the inflation condition was escalated from prices just needing to be contained. 

Macklem reiterated officials are less forward-looking while mapping out different paths for the economy amid the biggest trade war since the 1930s but his press statement said the lack of a regular forecast "does not impede our ability to take monetary policy decisions." He holds a press conference at 1030am EST.

The "current tariff scenario" shows GDP contracting at a 1.5% annualized pace in the second quarter and rebounding with 1% growth in the third, avoiding a technical recession after 2.2% first-quarter growth. Even the GDP swing reflects stockpiling ahead of tariffs the Bank noted, and so far the global and Canadian economies have shown resilience.

With the Bank's single mandate to keep headline inflation in a 1% to 3% band, the main scenario shows core CPI advancing at a 3.1% pace in the third and fourth quarters. Trend inflation appears to be closer to 2.5% the Bank said. 

One big reason all 17 economists polled by MNI saw the overnight rate staying 2.75% for a third meeting was that cutting invites criticism about a repeat of the burst of inflation following pandemic lock-downs. Worst-case scenarios around a recession opening up more slack that would curb inflation have receded with a return to job gains and non-U.S. exports pulling the trade deficit back from a record. 

Economists on balance say tariff damage requires stimulative monetary policy towards the end of the year with perhaps two rate cuts. The Bank earlier cut seven times between last June and March. Canada sends three-quarters of its exports to the US and those suppliers account for one in ten jobs.

Proof of the need for stimulus may not emerge until Canada reports second-quarter GDP Aug. 29 and the federal government presents a fall budget costing out increased deficit spending on NATO's defense target. There are also slower-moving risks as consumers refinance popular five-year fixed-rate mortgages taken out when borrowing costs were at record lows, and the government's move to slash immigration that could slow demand and pressure on housing costs. 

The Bank took the rare step of twice mentioning strength in Canada's dollar including that it's helping curb import costs. Even with the Bank's lending rate about the farthest below the Fed’s benchmark since the 1990s, the US dollar has weakened globally this year as investors question the impact of Trump's policies.

Canada's rate decision is a rarity coming on the same day as a Federal Reserve announcement, even giving less reason for a policy shift. 

"The unusual degree of uncertainty does mean we have to put more weight on the risks, look over a shorter horizon than usual, and be ready to respond to new information," Macklem said.