Bank of Canada sees inflation nearing normal levels

Governor Macklem notes improving inflation trends, hinting at potential rate cuts in upcoming June decision

Bank of Canada sees inflation nearing normal levels

Bank of Canada Governor Tiff Macklem remarked that inflation is nearing “closer to normal” levels, indicating potential shifts in the central bank's approach to monetary policy.

Speaking from Washington, DC, via teleconference, Macklem highlighted the recent positive trend seen in the March inflation data. This data marked the third consecutive month where total inflation remained below 3 percent, aligning with the upper end of the Bank of Canada's target range.

Additionally, core inflation, which excludes volatile items like food and energy, also showed easing.

The Bank of Canada, aiming to maintain inflation at 2 percent, kept its benchmark interest rate steady at 5 percent last week. Macklem noted the possibility of a rate cut by June, pending further data.

“Between now and our June decision, we'll get further pieces of data. And we're going to be looking for evidence that the progress [on inflation] is sustained,” Macklem stated during his attendance at the annual spring meetings of the International Monetary Fund and World Bank.

Macklem expressed optimism about the progress towards price stability, though he emphasized the need for this trend to continue to ensure confidence in long-term stability.

He pointed out that inflation is becoming less widespread across the economy, with now just under 40 percent of the components in the consumer price index rising above 3 percent.

As the Canadian economy shows signs of recovery from weak growth in the latter half of the previous year, Macklem anticipates solid growth for Canada this year. Notably, the labor market has cooled, with rising unemployment rates, and corporate pricing behaviors are reverting to pre-pandemic norms.

Despite these positive indicators, the potential for rate cuts by the Bank of Canada is complicated by the US Federal Reserve's current stance.

Fed Chair Jerome Powell recently indicated that US officials are not yet convinced that inflation is consistently moving towards their 2 percent target, suggesting a more cautious approach that may influence Canada's monetary policy decisions.

Economists warn that significant rate cuts by the Bank of Canada could weaken the Canadian dollar, potentially reigniting inflation due to the cost of imports priced in US dollars.

Doug Porter, chief economist at BMO Capital Markets, noted, “With almost all major measures of inflation now tucked just below 3 percent, and short-term trends even softer, and the jobless rate above 6 percent and rising, the domestic case for rate cuts is strong.”

However, he has revised his forecast for Bank of Canada rate cuts in 2024 down to three from four, anticipating a policy rate of 4.25 percent by year-end.

Additionally, Macklem downplayed the impact of increased government spending on achieving the 2 percent inflation target, responding to concerns raised by some economists following a nearly 7 percent rise in federal government outlays in this year's budget.

He noted that the government is raising taxes to maintain a steady budget deficit level, suggesting that the budget changes are not significantly altering the economic landscape.