How fast and how far for further rate cuts, Bank of Canada?

Bank of Canada Governor Tiff Macklem takes part in a news conference after announcing an interest rate decision in Ottawa, Ontario, Canada March 6, 2024. REUTERS/Blair GableJeremy Kronick is associate vice-president and director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute, where Steve Ambler, a professor of economics at Université du Québec à Montréal, is the David Dodge Chair in Monetary Policy.

The bank cut its policy rate from 5 percent to 4.75 percent. Despite the cut, a strong case can be made that monetary policy is more restrictive now than it was at the Bank of Canada’s last announcement on April 10. This augurs well for further declines in inflation and further rate cuts.

A more restrictive monetary policy in real terms gives the bank added space to continue cutting. Even with headline and core inflation measures now inside the upper bound of the bank’s target band and actually below the target over the last three months, real rates will likely justify further cuts.To answer it, we need to estimate the neutral rate that the bank aspires to reach in the long run.

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