MNI INTERVIEW:BOC Still On Cut Path As GDP Falters- Ex Adviser
The Bank of Canada remains on track to cut interest rates as soon as July despite Wednesday's decision to keep them on hold, former special adviser Steve Ambler told MNI, arguing that Governor Tiff Macklem has underplayed early evidence the U.S. trade war is dragging down growth and the labor market.
The Bank waited in part because of the risk to their reputation if they cut and core inflation remains stubbornly high, Ambler said, adding figures coming before the July 31 decision could make a clear case for a reduction.
“Will it come in July? That’s a good question,” the former Universite du Quebec a Montreal professor said. “It’s really going to hinge on the two CPI reports from StatsCan and what June GDP is looking like.” (See: MNI INTERVIEW: Dodge Sees BOC Cutting To Low End Of Neutral)
While it kept borrowing costs at 2.75% Wednesday, the Bank said it will consider another rate cut if the trade war creates more damage and inflation stays under control.
Ambler pointed to the expectation of market economists for several rate cuts this year, alongside a technical recession with two quarters where GDP shrinks at an annualized pace of at least 1%, as signs stimulus is coming. Even the recent first-quarter GDP figure showing a gain of about 2% overstated weakness because exports and inventories were boosted by stockpiling ahead of potential U.S. tariffs, he said. Domestic spending was also weak, he said, a nod to the slight contraction in final demand.
RE-ENFORCING WEAKNESS
“Weakness signs are stronger than the Bank seems to be thinking, and the uptick in core inflation is worrisome, it’s hard to get a handle on,” he said. Core CPI rates have moved above the top of the Bank's 1% to 3% range for headline inflation and that will also be important in the Bank's timing, he said.
Job and housing markets are other areas the Bank will find evidence the economy is fading, he said. Unemployment has climbed to the highest since 2017 outside of the pandemic, and even Vancouver's traditionally strong housing market has turned to a phase of lower prices and sales.
"Weakness in the labor market is sort of re-enforcing weakness in the GDP numbers," he said. "The housing market seems to be kind of in the doldrums now." The next job report will show a reversal of April's hiring jump linked to temporary election workers, Ambler said. (See: MNI INTERVIEW: Tariff Uncertainty Means Lower BOC Rates- Ragan)
Macklem also interjected at the end of his press conference Wednesday to point out wildfires in western Canada will have an impact on the economy but it's too soon to calculate the effect.
That's on top of the Bank's shift in April to outline two scenarios trade-war damage instead of a regular forecast. In the mild scenario growth stalls this quarter and in the tougher one GDP contracts starting in the second quarter. Senior Deputy Carolyn Rogers said she hopes things are clear enough for a regular forecast at the next meeting.
Donald Trump's cycle of imposing and softening tariffs is a clear drag on Canada, which sells three-quarters of its exports to the U.S., "especially when it comes to investment spending," Ambler said. Even if a new trade pact is negotiated, executives will worry about whether Trump sticks to his word, he added.
