"Bank of Canada Officials Divided on Rate Cut Timing, but Agree Easing Will Be Gradual"

 Prior to the decision on April 10th regarding interest rates, the summary of discussions among members of the Bank of Canada's Governing Council indicates a growing confidence that inflation is on track to return to the 2 percent target. This paved the way for a potential reduction in interest rates next month.

However, some members of the council, under Governor Tiff Macklem's leadership, remain cautious, particularly in light of increasing internal demand in the United States and robust growth prospects. They have been cautious about lowering interest rates too quickly. It's advised that the next rate cut on June 5th is not a certainty.

According to Reuters data, financial markets are pricing in about a 45 percent chance of a rate cut in June, up from 80 percent for July.

While policymakers remain divided on the appropriate timing for the first rate cut, there's a growing consensus on the likely gradual path of monetary easing over the rest of the year.

"While there was diversity of views on when policy rate cuts might be appropriate, they agreed that monetary policy easing would likely be gradual, given the risks of a downturn and the slow path to achieving the inflation target," it was summarized in a Wednesday release.

It echoes Macklem's earlier remarks, who cautioned against the swift decline in rates seen in 2022 and 2023, as the Bank raised its policy rate by 4.75 basis points to contend with rising inflation.

Desjardins' chief economist, Rael Cline, wrote in a note to clients, "The cycles of past rate cuts were often rapid and abrupt, necessitating swift easing to manage a significant economic shock."

"Now policymakers are not yet face-to-face with a downturn, and the probability of a rapid decline in interest rates in 2022 and 2023, when the Bank raised its policy rate by 4.75 basis points to tackle inflation, is not probable," he said.

Bank Governor Macklem and independent members of the Governing Council have been encouraged by recent progress and are using a number of other indicators to measure inflationary pressures. Businesses are talking about less risk of rapidly rising prices, and there are limited signs of wage pressures easing.

More dovish members of the Council had noted this progress, saying in a summary: "Economic indicators associated with excess supply were consistent and combined with a base case projection showing that the output gap would only begin to close next year, they felt that there was a greater need to keep monetary policy more restrained in comparison to the economic policy needs."

However, more hawkish members of the council had urged caution, suggesting that the Canadian economy remains in better shape than expected, reducing the urgency for immediate rate cuts. They had leaned towards a slower path of normalization.

"They felt that the gradual progress towards the core inflation target was reducing the risks of an upward spiral in the core and that there was a need for greater reassurance that the progress made so far would not be jeopardized," it was summarized.

Macklem and other independent members of the Governing Council have not directly addressed where the debate stands but have noted that there remains an upward risk to inflation when the Bank starts cutting rates and raises home prices and, ultimately, puts upward pressure on oil prices.

Before the decision on June's rate, there is another consumer price index report due. The Bank hopes that the annual inflation rate will "bounce" to near 3 percent next month, down from below 2.5 percent before falling below 2.5 percent.

"If we get a fourth consecutive CPI report next month, then we'll see that the BoC will definitely consider a policy rate cut in June," said Benjamin Reitzes, Canadian rate strategist and macroeconomist at Bank of Montreal, in a note to clients. "Beyond that, it's clear that the rate cut will be gradual, and the BoC isn't in a hurry to return."