From the Bank of Canada website:
"Inflation in Canada remains high but should come down quickly to around 3% in the middle of this year because of lower energy prices, improved supply chains and restrictive monetary policy. The Bank projects that inflation will reach the 2% target by the end of 2024."
So this had me thinking. Is the current interest rate restrictive?
In the US Jerome Powell made it perfectly clear that he wants "real" interest rates to be positive and higher than real rates across the yield curve. In the US and Canada, a 10 year real yield is about 1.4% and it is often used as a proxy for measuring r*, also known as the neutral real interest rate.
The policy rate is neutral when it equals inflation expectations, say over a 12 month period, + r*
For the policy rate to be restrictive, the "real" policy rate has to exceed r* which is anywhere between 1 and 1.5%. In the last twelve months, Canada's real policy rate is 0.1%. Canada would be in restrictive monetary policy if inflation expectations over the next 12 months is under 3%. In this case, the forward "real" policy rate would be over 1.5% and would keep inflation expectations well anchored.
In my opinion, I believe the current policy rate is closer to a neutral rate as forward real interest rates is not sufficient enough to make it restrictive. It is perfectly fine to pause and assess.
I don't think Tiff Macklem will raise rates at the next meeting as headline numbers will be coming down but I think he might revisit that possibility later in the summer/year when headline numbers picks up again.