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The Bank of Canada’s top official said policymakers will consider cutting interest rates when inflation is “clearly” on a path to the two per cent target, but added that it’s “too early.”

In a speech Friday, Bank of Canada Governor Tiff Macklem said that once officials are assured that price pressures are on a sustained downward track, they “will be considering whether and when we can lower our policy rate.”

“I know it is tempting to rush ahead to that discussion. But it’s still too early to consider cutting our policy rate,” Governor Tiff Macklem said in prepared remarks from a speech in Toronto.

Still, the comments mark a shift in tone for the central bank. Macklem’s speech on Friday did not explicitly threaten that further hikes were on the table, although he did acknowledge that the bank must be “nimble” and adjust as needed.

While further declines in price pressures will likely be “gradual”, Macklem said that inflation will be “getting close to the two per cent target” by the end of next year, adding that “conditions increasingly appear to be in place to get us there” and that “underlying inflation pressures are easing in much of the economy.”

He sees policymakers continuing to debate “whether monetary policy is restrictive enough” and “how long it needs to remain restrictive to restore price stability.

Macklem also acknowledged that the central bank’s rate hikes are contributing to higher shelter inflation, which is currently one of the main upside contributors to headline inflation in Canada.

Last week, the Bank of Canada held interest rates at five per cent for a third straight meeting. Speaking to reporters a day after the Dec. 6 decision, Deputy Governor Toni Gravelle reiterated to reporters the central bank was “not even thinking about cutting rates.”

Macklem’s comments reinforce that the Bank of Canada is at least starting to consider when to begin lowering interest rates, adding to a growing list of central bankers pivoting their views on how their monetary policy stance should normalize next year.

On Wednesday, the Federal Reserve held borrowing costs steady, but dot plot forecasts showed broader consensus for rate cuts in 2024. In a subsequent press conference, Chair Jerome Powell indicated policymakers are now turning their focus to when to cut rates as inflation continues its descent toward their two per cent goal, prompting a sustained bond rally and stock market optimism.

But Europe’s central bankers aren’t ready to join the pivot. Yesterday, ECB President Christine Lagarde said the bank had not discussed rate cuts at all, saying “we should absolutely not lower our guard.” The same day, her BOE counterpart, Andrew Bailey, observed that “there is still some way to go” in the fight to tame consumer prices.

Canada’s heavily indebted households hold shorter duration mortgages that roll over more quickly than those held by their U.S. counterparts, a big reason why economists see the northern nation as more sensitive to higher borrowing costs.

The Bank of Canada next sets rates on Jan. 24. Before Macklem’s speech, traders in overnight swaps were pricing a 25 basis point cut by April of next year, with 1.25 percentage points of easing priced by Dec. 2024.

Source: BNN Bloomberg