EconoFACTS

April 24, 2024 | 14:24

BoC Summary of Deliberations (Apr. 10) — Not Quite There

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

The Bank of Canada's Summary of Deliberations from the April 10 policy meeting showed mixed views among the Governing Council. Some members were focused on upside inflation risks coming from stronger U.S. economic growth, and the recent improvement in the domestic backdrop (as highlighted by the better GDP growth forecast in the Monetary Policy Report). Other members of the Governing Council highlighted inflation progress to date. And, with excess supply forecast to persist into 2025, that is expected to put ongoing downward pressure on inflation.

Broadly, the BoC saw progress across the inflation metrics it is watching:

1) The supply and demand balance remains disinflationary with excess supply persisting into next year.

2) Corporate pricing behaviour was normalizing.

3) Inflation expectations are improving. There's more focus on business expectations, as the Bank views them as more forward-looking, while consumers tend to be backward-looking.

4) Wage growth has remained elevated. However, wages tend to lag labour market activity which has softened notably. Accordingly, wage gains look to "ease gradually in the coming quarters."

Nonetheless, inflation remains too high, and upside risks are a greater concern. Services inflation pressures remained a key area of concern. Even so, policymakers viewed both upside and downside inflation risks are "less acute". Housing was a focal point for the inflation discussion, with the Bank highlighting that the Trim core measure has consistently excluded mortgage interest costs over the past two years, while including other shelter components. This is a clear rebuttal directed at those pointing to CPI excluding mortgage interest costs.

On the domestic economy, the conversation was a bit more upbeat. The firmer backdrop is being driven by strong population growth, though the loosening labour market was highlighted.

Key quote from the final section: "While there was a diversity of views about when conditions would likely warrant cutting the policy rate, they agreed that monetary policy easing would probably be gradual, given risks to the outlook and the slow path for returning inflation to target." (the underline is our emphasis)

Key Takeaway: The Bank of Canada wants to see "sustained" easing in core inflation. Since the April 10 policy meeting, March CPI came in soft, building on the inflation progress seen in the prior two months. If we get a fourth straight subdued CPI report next month, it looks like the BoC will strongly consider cutting policy rates in June. Beyond that, it's clear that rate cuts will be gradual, and that the BoC is in no rush to get back to neutral.