BoC Cuts Policy Rate 25bp to 4.75%; Prime Follows

The Bank of Canada has announced it has:

reduced its target for the overnight rate to 4¾%, with the Bank Rate at 5% and the deposit rate at 4¾%. The Bank is continuing its policy of balance sheet normalization.

The global economy grew by about 3% in the first quarter of 2024, broadly in line with the Bank’s April Monetary Policy Report (MPR) projection. In the United States, the economy expanded more slowly than was expected, as weakness in exports and inventories weighed on activity. Growth in private domestic demand remained strong but eased. In the euro area, activity picked up in the first quarter of 2024. China’s economy was also stronger in the first quarter, buoyed by exports and industrial production, although domestic demand remained weak. Inflation in most advanced economies continues to ease, although progress towards price stability is bumpy and is proceeding at different speeds across regions. Oil prices have averaged close to the MPR assumptions, and financial conditions are little changed since April.

In Canada, economic growth resumed in the first quarter of 2024 after stalling in the second half of last year. At 1.7%, first-quarter GDP growth was slower than forecast in the MPR. Weaker inventory investment dampened activity. Consumption growth was solid at about 3%, and business investment and housing activity also increased. Labour market data show businesses continue to hire, although employment has been growing at a slower pace than the working-age population. Wage pressures remain but look to be moderating gradually. Overall, recent data suggest the economy is still operating in excess supply.

CPI inflation eased further in April, to 2.7%. The Bank’s preferred measures of core inflation also slowed and three-month measures suggest continued downward momentum. Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average. However, shelter price inflation remains high.

With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain. Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Mark Rendell in the Globe reports:

In the wake of the announcement, bonds rallied and yields fell, while the Canadian dollar weakened against the U.S. dollar, dropping briefly into the US$0.72 range before rebounding. Bay Street traders, meanwhile, upped their bets on further cuts this year.

Interest-rate swap markets, which capture expectations about monetary policy, now put the odds of another rate cut at the next BoC meeting on July 24 at around 40 per cent, according to Refinitiv data. Markets are pricing in two more cuts between now and the end of the year.

“Inflation remains above the 2-per-cent target and shelter inflation is high,” Mr. Macklem said Wednesday. “But total consumer price index inflation has declined consistently over the course of this year, and indicators of underlying inflation increasingly point to a sustained easing.”

This has not been without costs. The Canadian economy has flatlined over the past year, and actually shrank on a per-capita basis. Business insolvencies are up and the unemployment rate has risen a full percentage point as job creation has failed to keep pace with population growth.

Meanwhile, the country is facing a wall of mortgage renewals. Only about half of all homeowners with mortgages have renewed since rates started to rise in 2022. The other half, many of whom took on large mortgages when interest rates were at rock-bottom during the pandemic, are looking at huge payment shocks when they renew over the next few years.

And Darcy Keith provides a snapshot of the swaps market at 10:02am, seventeen minutes after the announcement:

Prime followed:

Well, Rob Carrick and Ryan Siever will be mad – nothing on the way up and precious few hopes for the way down:

There’s a case to be made for banks giving borrowers a break when what is expected to be the biggest interest rate hike in 22 years is announced on Wednesday.

A brief flashback to 2015 is required to get the sense of this story. The economy back then was in the opposite shape of what it is now – weak enough to prompt the Bank of Canada to cut its trendsetting overnight rate by 0.25 of a percentage point in January and again in July.

The big banks hijacked part of that rate cut. While the overnight rate fell by a total 0.5 of a point, the banks cut their prime rate by cumulative 0.3 of a point. They held back the rest of the rate cut to build their revenues and profit.

There was a delay in reducing the prime when the Canada Overnight rate dropped 25bp to 0.75% in January 2015 and again when Canada Overnight dropped a further 25bp to 0.50% in July of that year.

3 Responses to “BoC Cuts Policy Rate 25bp to 4.75%; Prime Follows”

  1. […] Canadian Preferred Shares: Data and Discussion « BoC Cuts Policy Rate 25bp to 4.75%; Prime Follows […]

  2. […] it looks like there were a few people who resolved to hold on to their FixedResets until the very first BoC policy loosening, reasoning that this was just the first step towards negative rates. Or maybe they were raising […]

  3. Joel A says:

    The duration play may not really go very deep and may just be a corrective second wave after this first big wave up into normalcy. I think this is new territory that has been counter intuitive to all the ‘training’ that the general investor has been conditioned into believing. Everybody is a genius and is ALWAYS saved by rate declines. May be different this time, Power needs to…MUST… inflate debt away, that is history.
    Yes, things change. In the mean time with FRRs I think I can ride out the rate down wave and just collect. This last couple years and the reversion to the mean has reset many of these instruments to outstanding HOLDS. Where will we be in four to five years? Not sure, but I’ll be five years older and can still go out and play kick the can in the greater world on my way to the greater beyond; just buying TIME.
    Will Canada still be around? I salute the Maple Leaf and put my money where my mouth is.

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