BOC: The pace of interest rate cuts will slow down
2025-02-18
■ If global trade frictions become protracted and lead to rising inflation risks, the trend of narrowing interest rate cuts will continue.
■ In future monetary policy decisions, it is necessary to continuously and in real-time assess the impact of trade frictions.
The Bank of Canada (BOC) released the minutes of its monetary policy meeting on January 29 on the 12th. At this meeting, the BOC cut interest rates for the sixth consecutive time. Previously, the interest rate cuts in June, July, and September 2023 were 0.25%, and expanded to 0.50% in October and December, while this meeting was narrowed again to 0.25%. The meeting minutes showed that participants discussed the possible impact of the protracted global trade frictions on economic activities and price trends.
Firstly, the imposition of large-scale tariffs may increase the risk of capital flight, and monetary policy cannot completely offset the long-term negative impact of trade frictions. Secondly, if tariffs lead to a temporary increase in the price of imported goods, it may push up short-term inflation expectations, so it is necessary to prepare for it in advance, which also reflects the BOC's cautious attitude toward the policy outlook. Thirdly, monetary policy can only support or suppress overall economic demand, and its tools are relatively limited, while fiscal policy can help the economy adapt to the long-term structural changes brought about by trade frictions. This shows that the BOC faces great challenges in policy response.
On the other hand, US President Trump has agreed to postpone the decision to impose a 25% tariff on Canadian imports for one month, avoiding immediate effect. However, the specific plan for mutual tariff increases is expected to be finalized before April 2, and the risk of long-term trade frictions still exists, and inflationary pressures are still lingering. The Meeting showed that considering the high uncertainty of the economic outlook and the complexity and breadth of potential trade friction scenarios, the BOC unanimously agreed that it is not appropriate to provide any forward-looking guidance on the future policy interest rate path at this time. In addition, the BOC emphasized that when formulating monetary policy, it is necessary to assess the impact of trade frictions in real-time and continuously, and comprehensively analyze relevant data on economic activities and prices.
The market expects that in the January consumer price index (CPI) released on the 18th, the overall CPI will rise by 1.8% year-on-year, the same as last month; the median CPI that the BOC is concerned about will rise by 2.5% year-on-year, and the CPI trim will rise by 2.6% year-on-year, and inflationary pressure may increase. The interest rate futures market shows that investors expect the BOC to cut interest rates by 0.25% at its next meeting on March 12 with a probability of about 46%, while the probability of keeping the policy rate unchanged is 53%.
■ In future monetary policy decisions, it is necessary to continuously and in real-time assess the impact of trade frictions.
The Bank of Canada (BOC) released the minutes of its monetary policy meeting on January 29 on the 12th. At this meeting, the BOC cut interest rates for the sixth consecutive time. Previously, the interest rate cuts in June, July, and September 2023 were 0.25%, and expanded to 0.50% in October and December, while this meeting was narrowed again to 0.25%. The meeting minutes showed that participants discussed the possible impact of the protracted global trade frictions on economic activities and price trends.
Firstly, the imposition of large-scale tariffs may increase the risk of capital flight, and monetary policy cannot completely offset the long-term negative impact of trade frictions. Secondly, if tariffs lead to a temporary increase in the price of imported goods, it may push up short-term inflation expectations, so it is necessary to prepare for it in advance, which also reflects the BOC's cautious attitude toward the policy outlook. Thirdly, monetary policy can only support or suppress overall economic demand, and its tools are relatively limited, while fiscal policy can help the economy adapt to the long-term structural changes brought about by trade frictions. This shows that the BOC faces great challenges in policy response.
On the other hand, US President Trump has agreed to postpone the decision to impose a 25% tariff on Canadian imports for one month, avoiding immediate effect. However, the specific plan for mutual tariff increases is expected to be finalized before April 2, and the risk of long-term trade frictions still exists, and inflationary pressures are still lingering. The Meeting showed that considering the high uncertainty of the economic outlook and the complexity and breadth of potential trade friction scenarios, the BOC unanimously agreed that it is not appropriate to provide any forward-looking guidance on the future policy interest rate path at this time. In addition, the BOC emphasized that when formulating monetary policy, it is necessary to assess the impact of trade frictions in real-time and continuously, and comprehensively analyze relevant data on economic activities and prices.
The market expects that in the January consumer price index (CPI) released on the 18th, the overall CPI will rise by 1.8% year-on-year, the same as last month; the median CPI that the BOC is concerned about will rise by 2.5% year-on-year, and the CPI trim will rise by 2.6% year-on-year, and inflationary pressure may increase. The interest rate futures market shows that investors expect the BOC to cut interest rates by 0.25% at its next meeting on March 12 with a probability of about 46%, while the probability of keeping the policy rate unchanged is 53%.