Central banking news here, there and everywhere

• Canada's February inflation was lower than expected; will the Bank of Canada consider early rate cuts?
• The U.S. Federal Reserve hinted at three possible rate cuts this year, with Chair Jerome Powell's more accommodative stance boosting optimism in already optimistic markets.
• The Bank of Japan raised interest rates for the first time since 2007, diverging from global central bank trends. 

Canada had great news, with inflation coming in below expectations. The consumer price index for February came in at 0.3% month over month, but 0.1% if seasonally adjusted. Yearly inflation came in lower than the January print and much lower than the 3.1% expected, at 2.8%. The lower inflation gave the Bank of Canada (BoC) some breathing room on the path toward rate cuts. The question is whether the much lower inflation is an anomaly or a trend. Given the recent Canadian economic data, a trend is more likely. Using the current 12-month average as our starting point, that would suggest a continued and gradual easing of inflation toward 2% on a year-over-year basis by mid-summer (right in the middle of the BoC’s target). If the Bank of Canada chooses to follow the same philosophy as what U.S. Federal Reserve (the Fed) Chair Jerome Powell laid out last fall, it will start to ease monetary policy ahead of reaching its target, to prevent it from overshooting inflation to the downside. That would suggest the first cut may come ahead of the July meeting, with a cut in April still solidly on the table.

While data suggests that the BoC may cut rates before the Fed, don’t start celebrating too soon. The problem is that if the BoC moved first, this would likely have a weakening effect on the loonie against the greenback. However, economic growth and inflation are not on the same path in Canada as in the U.S., so we shouldn’t expect monetary policies to be on the same path either. We continue to believe the greater risk lies in a policy mistake should the BoC hesitate on rate cuts. If the BoC is reluctant to be first, it should be glad to learn that the Swiss Bank unexpectedly cut its rates this week.

Fed Chair Powell did what some were starting to believe he wouldn’t do: continue a more accommodative stance in the face of markets going higher and higher. The Fed indicated the potential for three rate cuts within the year amidst substantial easing of inflation. Powell's remarks during the press conference hinted at an informal inflation target adjustment to 3%, fuelling optimism for a pre-election rally. Notably, technology and small-cap stocks led the surge, although Apple faced a setback due to regulatory concerns.

The Bank of Japan (BoJ) concluded its negative interest rate policy, initiating its first rate hike since 2007. It guided overnight rates to 0-0.1% and added 0.1% interest on excess reserves. The departure from its yield curve control policy, while maintaining Japanese Government Bond (JGB) purchase rates, signified a cautious shift. Japan is going against the world trend with this move. Its stock index is up almost 50% in the last 12 months.

Listen to this week’s podcast for further insights.