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The Bank of Canada held its key interest rate steady at 5%, saying more time is needed for higher rates to bring inflation back to target. Maria Solovieva, Economist at TD, discusses with MoneyTalk’s Greg Bonnell why a June rate cut is still likely.
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* Bank of Canada held its trend setting rate at 5% today, saying it's too early to talk about cutting rates as they attempt to get inflation back down to target. Joining us now to dig into the details is TD economist Maria Solovieva. Maria, great to have you back with us.
* Thank you for having me back.
* I'm going to throw this out there to begin with. Remember those word clouds when people try to go through a document and say, what are the words that appear the most? I think if we did one for this, which we didn't, "too early," "persists," "more time." This is the bank telling us we'll hold on. Let us get the work done. What did you take from it?
* Like you said, clearly, the bank is not ready to cut yet. And they're not even ready to start talking about cutting rates or considering cutting rates at this point. So from the perspective of where it leads us, we still think that the bank will be eventually cutting rates but closer to the second half of this year.
* They did mention that the rates are working through the economy, and they do see more economic slack building up. However, the progress that has been made on inflation is still not accelerating. So they still see the persistence in inflationary pressure. And at this point, it makes sense for them to stay put.
* Now, what do they need to see? Because we're talking about the second half of the year. We're into March now, so we're a couple of months away. But still, in two or three months, we could be in a position where the Bank of Canada would deliver that first rate cut. What do they need to see in the data up to that point to say, OK, we're getting back to 2%, we can move now?
* So they've alluded to it already. There is way too many factors that are growing at 3% to 3.5%. So they would like to see fewer factors of inflation that are growing at this pace. So as this narrows, you'll get closer and closer to their inflation target.
* From what we can see is that they would like to see the core inflation drawing under 3%. And we're still not there. And since there is only one more month of data before April, and the next meeting is in June, it points to that interest rates will remain at this level for the next quarter, at least, and we will expect probably some more communication from the Bank of Canada as more data comes in.
* One of the questions heading into this announcement wasn't what they were going to do with rates-- pretty widely expected they would do nothing-- but how they would view the whole housing portion of this, the shelter inflation. Because Tiff Macklem was willing to say, if you take that out, yeah, we're already below target. But they're not willing to look through it either. It's a bit complicated.
* Yeah. It's one of those questions. If we do see them start talking about looking through shelter inflation, that will also be some sort of a sign that we are getting closer to the point of rate cuts. At this point in the first couple of questions that we saw from the conference, they're saying, no. At this point, we're not ready to do that.
* Inflation is still persistent, right? And clearly, the risk is on the acceleration of inflation in the future as well. So they would like to avoid moving too soon, and despite the fact that we know shelter inflation will remain persistent and will remain a factor in inflationary pressure going forward as well.
* Yeah. There was a part of that opening statement that you and I were watching together that really struck me as a rock, hard place, Tiff Macklem right in the middle. We don't want to keep monetary policy restrictive longer than we have to, nor do we want to jeopardize all the work we have done.
* It's almost a way of feeling your way through it. I know there's data they have to do, but at some point they're going to have to say, we think we're on the right track here.
* Yeah. I think Larry Summers put a very interesting perspective. It's like taking medicine, right? If you stop taking medicine too soon, then what happens is you get sick. And you may get sick even worse. So I think this is a similar notion that Macklem is alluding to.
* Let's talk about what goes forward from here. If we do see, perhaps by June, that they're ready, based on the data, to start cutting, what will we expect afterwards? We've been told we're fully in restrictive territory. Surely it's not a one and done. It's got to be a one and then progress after that lower.
* Yeah. And they're going to take it slow from what we're seeing. Again, if nothing changes in the dynamics of the economy, if we see a slow progress towards deceleration of inflation, then we will likely see 25 basis point cuts throughout the rest of the year.
* Biggest risk that we're watching for? There's always risks, right?
* Well, I guess the biggest risk that Tiff Macklem alluded to is energy prices and potential costs in transportation. So geopolitics are definitely playing a big role here. So we'll be watching closely.
* Always great to get your insights, Maria. Thanks so much.
* Thank you very much for having me.
* TD Economist Maria Solovieva.
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* Bank of Canada held its trend setting rate at 5% today, saying it's too early to talk about cutting rates as they attempt to get inflation back down to target. Joining us now to dig into the details is TD economist Maria Solovieva. Maria, great to have you back with us.
* Thank you for having me back.
* I'm going to throw this out there to begin with. Remember those word clouds when people try to go through a document and say, what are the words that appear the most? I think if we did one for this, which we didn't, "too early," "persists," "more time." This is the bank telling us we'll hold on. Let us get the work done. What did you take from it?
* Like you said, clearly, the bank is not ready to cut yet. And they're not even ready to start talking about cutting rates or considering cutting rates at this point. So from the perspective of where it leads us, we still think that the bank will be eventually cutting rates but closer to the second half of this year.
* They did mention that the rates are working through the economy, and they do see more economic slack building up. However, the progress that has been made on inflation is still not accelerating. So they still see the persistence in inflationary pressure. And at this point, it makes sense for them to stay put.
* Now, what do they need to see? Because we're talking about the second half of the year. We're into March now, so we're a couple of months away. But still, in two or three months, we could be in a position where the Bank of Canada would deliver that first rate cut. What do they need to see in the data up to that point to say, OK, we're getting back to 2%, we can move now?
* So they've alluded to it already. There is way too many factors that are growing at 3% to 3.5%. So they would like to see fewer factors of inflation that are growing at this pace. So as this narrows, you'll get closer and closer to their inflation target.
* From what we can see is that they would like to see the core inflation drawing under 3%. And we're still not there. And since there is only one more month of data before April, and the next meeting is in June, it points to that interest rates will remain at this level for the next quarter, at least, and we will expect probably some more communication from the Bank of Canada as more data comes in.
* One of the questions heading into this announcement wasn't what they were going to do with rates-- pretty widely expected they would do nothing-- but how they would view the whole housing portion of this, the shelter inflation. Because Tiff Macklem was willing to say, if you take that out, yeah, we're already below target. But they're not willing to look through it either. It's a bit complicated.
* Yeah. It's one of those questions. If we do see them start talking about looking through shelter inflation, that will also be some sort of a sign that we are getting closer to the point of rate cuts. At this point in the first couple of questions that we saw from the conference, they're saying, no. At this point, we're not ready to do that.
* Inflation is still persistent, right? And clearly, the risk is on the acceleration of inflation in the future as well. So they would like to avoid moving too soon, and despite the fact that we know shelter inflation will remain persistent and will remain a factor in inflationary pressure going forward as well.
* Yeah. There was a part of that opening statement that you and I were watching together that really struck me as a rock, hard place, Tiff Macklem right in the middle. We don't want to keep monetary policy restrictive longer than we have to, nor do we want to jeopardize all the work we have done.
* It's almost a way of feeling your way through it. I know there's data they have to do, but at some point they're going to have to say, we think we're on the right track here.
* Yeah. I think Larry Summers put a very interesting perspective. It's like taking medicine, right? If you stop taking medicine too soon, then what happens is you get sick. And you may get sick even worse. So I think this is a similar notion that Macklem is alluding to.
* Let's talk about what goes forward from here. If we do see, perhaps by June, that they're ready, based on the data, to start cutting, what will we expect afterwards? We've been told we're fully in restrictive territory. Surely it's not a one and done. It's got to be a one and then progress after that lower.
* Yeah. And they're going to take it slow from what we're seeing. Again, if nothing changes in the dynamics of the economy, if we see a slow progress towards deceleration of inflation, then we will likely see 25 basis point cuts throughout the rest of the year.
* Biggest risk that we're watching for? There's always risks, right?
* Well, I guess the biggest risk that Tiff Macklem alluded to is energy prices and potential costs in transportation. So geopolitics are definitely playing a big role here. So we'll be watching closely.
* Always great to get your insights, Maria. Thanks so much.
* Thank you very much for having me.
* TD Economist Maria Solovieva.
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