When will rates finally fall? | Tiff Macklem, Carolyn Rogers grilled on Bank of Canada's next move

There you know, since our last report in April, there have been quite a number of economic indicators. And certainly what they're suggesting is the economy is now expanding. And the signs as that data have come in have become clear. You know, for the second quarter, we're estimating growth of about 2 and 1/2%. So, where is that coming from? Well, a few sources. First of all, we've seen continued resilience on behalf of Canadian households, consumers. Consumer spending has remained pretty solid through this. The housing market had been weak. It had actually been contracting. It looks like it's stabilizing. So, it's probably not going to add a lot to growth, but it's not going to be subtracting from growth. I think where we're seeing a bit more momentum is in exports. Exports, as you know, have adjusted to US tariffs. And they now look to be growing again. Yes, they're growing along a lower path than what they were on, but they are getting back to growth. I mean, when we talk to businesses, what we're hearing is they're adapting to this uncertainty. The other thing is that the US economy is strong. That is creating strong foreign demand for our exports. US orders, you know, they are starting to come back. Businesses, in some cases like aluminum, businesses are finding new markets in Europe, for example. So we're seeing a certain adaptation and with more strength in exports, we think there'll be a pick up in business investment. Certainly we expect to see some boost in the near term in business investment coming out of the oil and gas sector. Higher oil prices are encouraging more investment in oil and gas. So, you know, you put those things together, the second quarter is looking we already have a fair amount of data for the second quarter. That's looking pretty solid. I think the thing that we're going to be assessing going forward is how sustainable is that pick up. We think, you know, when we talk to companies, when we look at the sort of change in momentum, we do think it is sustainable. But yes, there is a risk. Growth, particularly exports, could stall going forward. If exports stall, I think investment will stall, hiring will slow down. So, there are some risks, but increasingly the economy's looking like it is in expansion.

The short answer to that question is yes. Let me emphasize a couple of things. If you go back to our April report, we outlined a scenario where oil prices were high and they stayed high. And what we indicated is in that scenario, if that happens, the likelihood that higher oil prices start to pass through to prices of other goods and services, inflation becomes more generalized and starts to become more persistent. And we indicated in that scenario, yes, we would likely need at least consecutive hikes in interest rates to get inflation back to our target. So, where are we today? Well, today oil prices are lower than their peaks in April. Obviously, in the last week you've seen them back up considerably. They're about halfway back to where they were. And look, let's be frank. The situation in the Middle East remains very volatile. It looks like it's a long way from being resolved. And so, yes, if oil prices go higher and they remain higher, there may well still be a need for consecutive hikes. I do want to stress though that that's not our base case. It wasn't our base case in April. It's not our base case now. Our base case now is that oil prices will gradually ease. Inflation in Canada will also gradually ease. But it is a risk. And the last thing I would just underline is it's not the only risk. For example, in my response to the previous question, we are more encouraged that growth is picking up. But there are questions about how sustainable that pick up is. And if exports stall, if investment weakens again, if housing slows, there'll be more excess supply in the economy, more downward pressure on inflation. So there are risks on both sides and where we landed today is that at this moment our best judgment is where we are now looks appropriate, but we underlined uncertainty is high and we're prepared to adjust monetary policy as needed.

Well, you described our outlook pretty well. I'm not sure how much more I can add really. Look, I'm not going to give you, I'm not going to handicap the next decision. We're going to take our decisions one at a time. I think what I would emphasize there is that monetary policy has been facing this dilemma as you suggested. Inflation is high. It's above our target. It's actually a little bit outside the one to three band. Growth been weak. The economy hasn't really shrunk over the last year but it hasn't grown either. And there's considerable excess supply in the economy which means there's room for the economy to grow without creating inflationary pressures. The thing is you can't at the same time raise rates to lower inflation and lower rates to raise growth. So there's a dilemma. As we've seen, relative to where we were, if this forecast plays out, that dilemma will be resolving itself. As you said, growth will be picking up, inflation will be coming down. In that sense, it's a fairly positive outlook. There are risks around that outlook, which I've already talked about. The reality is that the world's an uncertain place. And there's always some uncertainty about just how events will play through, how they will affect the Canadian economy, how quickly it's adapting, how quickly higher costs will get passed through. We'll be watching all those things and as we've indicated, we're prepared to respond as needed.

Well, the short answer, Paul, is it's not been a major factor. The Canadian dollar has depreciated about a couple of cents since the last decision. We, as you know, don't target the Canadian dollar. Flexible exchange rate is an essential part of our monetary policy framework. It allows us to set interest rates in Canada for the needs of the Canadian economy. And I think as we mentioned in the report, you've seen some widening in yield government bond yields between Canada and the United States. I think that's weighed a bit on the Canadian dollar. As we highlighted in the report, a weaker Canadian dollar does make our exports a little more competitive. At the same time, it does increase the costs of imports into Canada. We don't forecast the Canadian dollar. We have assumed a 71 cent dollar going forward in our forecast. So that effect is about, you know, 2 cents is a pretty small effect in our forecast. The boost to inflation would be pretty small and the impact on exports would be pretty small. It's not a major consideration in the forecast. But yes, it is embedded in the forecast.

Well, these are major projects that are in the development stage, so they don't show up, it'll take a long time before they show up in the hard economic data. Your question about confidence, it would be hard to discern any one project's effect on confidence measures from the survey data that we track. But I think what you could say is that the up in optimism that we have in this outlook is affected overall by confidence and I think it would be reasonable to think that one of the things contributing to that is some of these larger project announcements.