By Paul Vieira
OTTAWA--Bank of Canada Gov. Tiff Macklem says inflation is getting "closer to normal" and officials will monitor incoming data to check whether the downward momentum can be maintained.
Speaking to reporters in Canada via teleconference from Washington, D.C., Macklem said inflation data covering the month of March was a step in the right direction. For the third straight month, total inflation was under 3%, or the upper end of the Bank of Canada's inflation-targeting range, and core prices--excluding volatile items like food and energy--eased.
The Bank of Canada sets its rate policy to maintain 2% inflation. The central bank left its benchmark interest rate unchanged at 5% last week, and Macklem said a cut in June was a possibility.
"Between now and our June decision, we'll get further pieces of data. And we're going to be looking for evidence that the progress [on inflation] is sustained," Macklem said Friday, on the sidelines of the annual spring meetings of the International Monetary Fund and World Bank.
"We're encouraged by the progress we've made. We just need to see it for longer to be confident that the progress toward price stability will be maintained."
He said inflation is becoming less broad based, with now just under 40% of components in the consumer-price index rising above 3%. "That's not quite at a normal level, but it's getting closer to normal," Macklem said.
Most economists have largely gravitated toward the expectation that the Bank of Canada cuts its target for the overnight rate on June 5, or its next scheduled policy decision. Unlike the U.S., which is generating surprisingly strong growth and hotter-than-anticipated inflation, rapid rate increases over a compressed period are straining both households and businesses in the country.
Growth was weak in the second half of last year, but has picked up some steam in early 2024. Macklem said he now expects solid growth for Canada this year. More important for the central bank, the labor market has cooled, with the unemployment rate rising, and corporate pricing behavior appears to be returning to prepandemic norms.
"With almost all major measures of inflation now tucked just below 3%, and short-term trends even softer, and the jobless rate above 6% and rising, the domestic case for rate cuts is strong," said Doug Porter, chief economist at BMO Capital Markets.
One caveat, however, is the Federal Reserve's reluctance to cut rates amid firmer inflation. Fed Chair Jerome Powell said this week officials aren't yet confident inflation was returning to its 2% target.
Economists say Canada's central bank might be limited on how deep it can cut with the Fed on the sidelines, as that could cause the Canadian dollar to weaken, and risks reigniting inflationary pressures because imports are largely paid for in U.S. dollars.
Porter last week scaled back his prediction for Bank of Canada rate cuts in 2024, to three from four, with the policy rate ending 2024 at 4.25%.
Meanwhile, Macklem played down the potential impact from higher government spending on reaching 2% inflation. Some economists said the nearly 7% increase in federal government outlays this fiscal year, as presented in this week's annual budget plan, could complicate the central bank's task to slow activity and reach its inflation to target.
The budget, as a whole, "doesn't look like a big change," Macklem said, noting the government is raising taxes to keep the budget deficit at a steady level.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
04-19-24 1615ET
