JP Morgan considers the upcoming Bank of Canada (BoC) meeting to be a close call but leans towards the BoC holding rates steady. Governor Macklem has previously emphasized a gradual easing approach to avoid jeopardizing progress on inflation. Recent data showing reacceleration in core inflation and wage firming, despite some labor market softening, suggests a compelling case for patience until September.
Key Points:
Governor Macklem’s Stance:
- Gradual Easing: Governor Macklem has advocated for a gradual easing cycle to avoid undermining progress made on inflation.
- Caution Against Rapid Cuts: Cutting rates too quickly could jeopardize the gains made in controlling inflation.
Economic Indicators:
- Core Inflation: The 3-month annualized growth of the BoC’s preferred core inflation measures has reaccelerated to the top of its target band since the June rate cut.
- Business Uncertainty: Businesses expressed more uncertainty about the inflation outlook in Q2.
- Wage Growth: Wages have firmed recently, despite some further softening in the labor market.
Market Expectations:
- Nearly Priced In: Markets are nearly fully priced for a 25bp cut this month.
- Balancing Act: The BoC may not want to surprise markets, but the economic evidence supports waiting until September.
Comparison with the Fed:
- Gradual Fed: The BoC may consider the gradual approach of the Fed as a factor in its decision-making process.
Conclusion:
JP Morgan leans towards the BoC holding rates steady at this week's meeting, despite market expectations for a cut. Governor Macklem’s preference for gradual easing, alongside recent economic data, supports the case for patience until September. The BoC's decision will balance market expectations with the need to ensure sustainable progress on inflation.
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