Door could be open for 'more aggressive' rate cuts, says BMO's Porter
There were no surprises in the Bank of Canada’s decision to lower its benchmark interest rate yet again in yesterday’s announcement – but the door could be open for the central bank to be even more aggressive in cutting rates in the coming months.
That’s according to Bank of Montreal (BMO) chief economist Doug Porter (pictured), who told Canadian Mortgage Professional that a recent change in market view on the US Federal Reserve’s likely approach to rate drops had cleared the way for Canada’s central bank to continue cutting.
Fed chair Jerome Powell gave his clearest indication yet that lower rates are on the way in comments delivered at its annual retreat in Jackson Hole, Wyoming on August 23, meaning there’s little risk of a divergence between the Canadian and US central banks’ approaches. “With the Fed essentially about to move in lockstep, or close to it, it’s really made it easier for the Bank of Canada to cut rates too,” Porter said.
“That was really the last constraint on the Bank of Canada. The inflation numbers are coming in as they expected, if not even a little better. The unemployment rate is backing up. So there’s lots of justification for the Bank to cut interest rates, and it certainly seems they’re primed to do more.”
Is the Bank of Canada worried about inflation falling too far?
Yesterday’s move meant the Bank has now reduced its overnight rate by 75 basis points in three consecutive quarter-point cuts since the beginning of June – and comments delivered by Governor Tiff Macklem after the announcement, Porter said, suggested the inflation outlook could be giving decisionmakers cause to consider even bigger individual cuts looking ahead.
Macklem mentioned the risk of inflation falling too low and said the Bank cares “as much” about inflation drifting below its 2% target as about it being above that figure. With inflation currently back to normal, “and given that rates are well above normal, that gives the Bank lots of leeway to cut interest rates,” Porter said.
Governor Tiff Macklem: “We are determined to get inflation down to the 2% target, and we want it to stay there.” https://t.co/lqCMCgjx4W#cdnecon pic.twitter.com/rqYJWRWs1f
— Bank of Canada (@bankofcanada) September 4, 2024
“There’s all kinds of talk about the Federal Reserve cutting in 50-basis-point increments, maybe not with their first cut [in September] but at some point this year. So if that were to be the case, that really opens the door for the Bank of Canada to move faster.”
What impact would an oversized cut have on the housing market?
The mortgage and real estate industries are still awaiting an uptick in housing market activity following the Bank’s first two rate cuts of the year. Homebuying remained sluggish in July, according to the Canadian Real Estate Association (CREA) – but while more aggressive cuts by the Bank wouldn’t necessarily light a fire under the housing market, they could certainly help spur a resurgence of sorts, according to Porter.
An oversized rate cut down the line, he said, “might jolt [the market] out of its slumber. The reality is the longer-term mortgage rates already reflect the expectation that the Bank will continue trimming interest rates but if they started chopping them quickly, maybe in half-point cuts or even more, that would come as a bit of a surprise to the market and would probably lead to some downward pull in the longer-term interest rates.”
While the current pace of rate drops looks set to keep a floor under the housing market, it would take a “surprisingly deep” cut by the central bank to shake the market into life, Porter argued.
After maintaining hawkish language in its approach to interest rates as it battled against stubbornly high inflation throughout 2022 and 2023, the Bank has adopted a milder tone in recent announcements.
Royal Bank of Canada (RBC) economist Claire Fan, writing yesterday morning, highlighted Macklem’s “dovish” opening statement to reporters following the rate decision and his comfort in discussing the likelihood of future rate cuts.
The stage is set, she said, for another rate drop at its next announcement, scheduled to take place in October. “Despite some pockets of sticky price growth… the tone from the BoC has clearly shifted,” Fan wrote, “to worrying about a gradually but persistently weakening [economy].”
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