Bank of Canada’s Rate Cuts
The start of school inevitably includes an inventory check of materials to meet the needs of students who are returning to class this week. Fortunately, there are many providers of the required items. Many finance professionals are also returning to the office, and many are checking their bond holdings in front of the Wednesday meeting of the Bank of Canada.
The overnight futures curve is calling for about 150 basis points of easing through the next twelve months. Simple math would suggest six cuts of 25 bps would get us there. The Bank meets eight times per year, which allows a little more easing to be done sooner rather than later. But is a 50 bp cut on the table?
Looking at the data, there are a range of CPI numbers released that all seem to point to a return to the 2% target. The BOC core year-over-year number has been under 2% for the last four months with the July print coming in at 1.7%.
Monetary Policies
Monetary policy can be viewed in terms of restrictive policy designed to bring down inflation, stimulative policy designed to boost economic growth, and neutral policy to keep a balance between growth and inflation. Given the reduction in inflation and rate cuts, it seems fair to assume that the Bank of Canada is moving from restrictive to neutral policy.
Neutral policy is not observable, unfortunately. But we can employ inductive reasoning and apply the June FOMC Projections to Canada and suggest that our neutral would be like the US central tendency of 2.5 to 3.5%, if not lower, reflecting a less diversified economy. The futures market is calling for 6-12 months to get to a neutral level, but that may be too long.
The currency isn’t helping either. I would typically expect the Canadian Dollar to be weaker after two interest rate cuts and expectations of a third in front of the first move by the FOMC. However, it has been stronger since the first cut in June. This has helped consumers modestly but hasn’t helped exports with energy prices now back to similar levels.
A cut of 50 bps would be a pleasant surprise to a market that has it priced at 22% probability according to Refinitiv.
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