MNI INTERVIEW: June BOC Cut Likely After Surprise Hold-Beaudry

The Bank of Canada’s decision to hold interest rates Wednesday makes a reduction more likely at the next meeting in June as the U.S. trade war hobbles the economy, former deputy governor Paul Beaudry told MNI

“I was a bit surprised they didn’t cut,” Beaudry said. “When I listened to what they said, it was very much along the lines that they kind of said last time.” The BOC in March cut rates for a seventh consecutive meeting, but investors had been split over what to expect this time.

Both of the central bank's new scenarios of damage from a mild or prolonged global trade war showed a relatively minor boost to inflation compared with damage to economic growth, according to Beaudry. Officials did appear concerned about higher price expectations, sticky core indexes and are perhaps nervous about being attacked for another burst of inflation like that after Covid lockdowns, he said. (See MNI: Canadians Doubt BOC Wins Inflation Fight-Internal Polls)

“It seemed there was more risk on the downside, but at the same time, I understand the aspect of thinking, okay, let's wait a bit,” said Beaudry, who left the BOC in July 2023 to return to teaching at University of British Columbia. 

FORWARD LOOKING?

Governor Tiff Macklem held the key rate at 2.75%, saying he will proceed cautiously and cannot give forward guidance amid uncertainty sown by volatile U.S. trade policies. Macklem said he can move "decisively" if there is clear evidence of recession or unwelcome inflation. 

“In some sense they're saying they didn't want to be forward looking," Beaudry said. "But in some sense, I see this as being very forward looking, in the sense of kind of right now being cautious just in case we get some of these pressures up on prices.”

While history shows inflation can quicken even during a downturn, Beaudry said a sustained boost to prices has become less likely in recent weeks as Donald Trump backed away from the most punishing tariffs on Canada and as domestic officials avoided big counter-tariffs that would have boosted prices on imports.

"If it was that direct trade war and that we were retaliating very severely, I do think you'd be really putting pressure up, even if the economy was kind of getting into a recession,” Beaudry said. “I put less weight on it right now than a month ago or six weeks ago, where we really felt it was like the Trump administration was really attacking Canada."

JUNE MORE LIKELY

America's global tariffs create another hit to Canada's growth besides the bilateral dispute, he said. “As long as we stay in this general kind of sense of uncertainty, and especially the U.S., the big trade war with China, it's not good for the U.S., it's not good for Canada.” (See MNI INTERVIEW:Tariffs Freeze Fed, Court Global Recession-Fatas) 

The Bank's mild and prolonged trade war scenarios both saw inflation back at about the 2% target in 2027, while a major trade war was seen triggering a year-long recession. Macklem told reporters that that downturn would include rising unemployment and some exporters going out of business. 

Weak growth and this week's BOC rate pause set up a June cut assuming there isn't another upheaval around tariffs for Canada, Beaudry said. “In my mind, that makes June more likely,” he said. “Then I can kind of see it kind of become a bit clearer, and probably in the next decision. So, yes, I do think there's more likely to be a rate cut at the next meeting.”

Canada's talk of offsetting trade war damage from internal reforms like freer trade between provinces and building new energy networks is overstated according to Beaudry, who studies employment and wages. 

“The idea that it would offset this completely, I think is wishful thinking,” he said. “You don't change the economy like this on a dime when you depend so much on U.S. exports.” (See MNI: Canada Will Struggle To Wean Off U.S. Trade Dependence)