MNI BOC WATCH: No Cut Competing With Fed Day, Trump Deadline

Bank of Canada Governor Tiff Macklem has no reason to shake things up with a shock interest-rate cut Wednesday hours before the Fed's rate decision and in the same week as Donald Trump's Aug. 1 deadline for 35% tariffs unless there's a trade deal. 

Resilient growth and inflation during the biggest trade war since the 1930s between two of the world's largest trading partners provide another reason all 17 economists surveyed by MNI see the Bank's policy rate staying at 2.75% for a third consecutive meeting in a decision due at 945am EST.

Core inflation Macklem says has his attention remains stuck around 3% or the top of his target band for headline CPI, and cutting now invites criticism about a repeat of the Covid price jump. Worst-case scenarios around a recession starting in the second quarter have receded with a return to job gains and non-U.S. exports pulling the trade deficit back from a record. (See: MNI INTERVIEW: Canada Exports Can Grow This Yr Despite Tariffs)

The Governor at the June 4 meeting said while tariffs make him less forward-looking, a cut remains in play if the economy stumbles and inflation remains stable. Economists on balance say damage from tariff threats requires stimulative monetary policy towards the end of the year with perhaps two rate cuts. The Bank earlier cut rates seven times between last June and March. 

LARGELY RINGING TRUE

Proof of the need for more stimulus may not emerge until Canada reports second-quarter GDP on 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. 

Canada's dollar has also shown unexpected strength this year, taking away one source of inflation from higher import costs. That's even with the Bank's lending rate about the farthest below the Fed’s benchmark since 1997. The U.S. dollar has weakened globally this year as investors question the impact of U.S. policies.

The Bank in April shunned a precise economic forecast to give two scenarios based on the trade war's intensity and it's unclear if a regular forecast will return in this decision. Macklem's press conference will also be a chance to learn his views on policy if no trade deal is reached and Trump imposes the tariffs or moves the deadline for a deal again. Prime Minister Mark Carney last week suggested an agreement may not be met by the deadline. 

"The Summary of Deliberations from June’s policy meeting listed three key reasons why the Bank left rates unchanged: heightened policy uncertainty, firm inflation data and surprising economic resilience. With all three of these still largely ringing true, next week’s decision seems a no-brainer," Bradley Saunders of Capital Economics wrote in a research note. (See: MNI INTERVIEW: Mild Stimulus Cures Canada Recession- Ex-Clerk)

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