BoC: Flexible path for cuts as inflation hovers near target – NBC

National Bank of Canada (BoC) economists Alexandra Ducharme and Jocelyn Paquet interpret recent Bank of Canada communication as favouring policy flexibility in response to supply shocks. With the economy in excess supply and inflation modestly above target, they see a path to BoC rate cuts if growth weakens materially, but judge the most likely outcome as inflation near 2% and policy on hold through 2026, with little chance of cuts in upcoming meetings.

BoC seen on extended policy hold

"Today, the economy is in excess supply with inflation modestly above target, a situation that requires “flexibility”. In theory, there’s a path to BoC cuts from here if inflation runs only a bit above target, but the economic shock is material. Of course, the ‘easier’ path to further cuts is inflation falling and consistently running below target."

"To us, the most likely outcome is for inflation hovering around 2% and slack persisting but gradually being reduced. This should lead to stand pat policy this year. If our economic or growth assessment is wrong, the response will differ."

"But making this assessment will likely take time, which is why we see little chance of a rate cut in the next few meetings."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)