June 2024 BoC: If You Ain't First, You're Last
By: Robert Both, Andrew Kelvin, Chris Whelan, Jayati Bharadwaj
Jun. 05, 2024 - 2 minutes 30 seconds
First to Cut Rates
The Bank of Canada (BoC) stepped off the sidelines with a 25bps cut to 4.75% in June, becoming the first G7 central bank to cut rates nearly a year after the BoC reached its terminal rate of 5.00%. The BoC framed its decision in response to substantial progress on underlying price pressures with improvement across the BoC's preferred measures of core inflation and a return to less broad price pressures, with fewer Consumer Price Index (CPI) components seeing large price gains. The BoC did not commit to any course of action for its decision in July, but the opening statement to Governor Macklem's press conference did conditionally state that "it is reasonable to expect further cuts to our policy interest rate".
The biggest roadblock to a June rate cut (in our view) was the persistence in wage growth and signs of stronger growth momentum heading into 2024. The BoC did not sound overly concerned with wages in the June communication, noting "pressures remain but look to be moderating gradually". The BoC did note stronger domestic demand in Q1'24, but there was no mention of April's flash estimate for industry-level gross domestic product (GDP) and the BoC also stated that with the return to excess supply, "there is room for growth even as inflation continues to recede".
Core Inflation Progress Opened the Door for BoC to Cut in June
Gearing Up for a Gradual Easing Cycle
Turning to the rest of the year, the BoC did make it clear that it expected to ease at a measured pace, as a rapid cutting cycle "could jeopardize the progress we’ve made." A gradual easing cycle is both sensible and likely, but we'd simply note that it would be unusual relative to history for the BoC to follow up the first cut of a cycle with a pause. Cuts in June and July followed by a pause in September could very easily meet the BoC's criteria for a gradual easing cycle, and as such we look for another 25bps rate cut in July. Turning to the rest of 2024, we expect that growth and inflation outlooks will have moderated by enough for the BoC to cut by an additional 50bps in Q4'24.
Return to Excess Capacity Helps Buffer Against Positive Growth Shocks
Market Implications
Rates: We look for a steeper curve for Canadian rates in the near-term. We do feel continued momentum in Canada is likely as the dovish regime is now in motion without question.
FX: We like USDCAD higher not just on Fed/BoC divergence but also from our quant model perspective. On the medium-term factors that matter including growth, inflation, carry, equity, we have seen an improvement in USD's weight and a decline in CAD's weight.
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Vice President and Macro Strategist, TD Securities
Vice President and Macro Strategist, TD Securities
Head of Canadian and Global Rates Strategy, TD Securities
Head of Canadian and Global Rates Strategy, TD Securities
Director and Senior Rates Strategist, TD Securities
Director and Senior Rates Strategist, TD Securities
