Source: Jin10 Data

Bank of Canada Governor Macklem fired the first shot in the G7 interest rate cut, and his confidence may encourage other central banks to believe that they can cut interest rates before the Fed.

Macklem explicitly stated that Canada's interest rate policy does not need to be synchronized with the United States, although this may bring downward pressure on the Canadian dollar. This is a bold signal that interest rate differentials are not a major concern for one of America's largest trading partners.

Even though the Fed may not begin to cut interest rates until later this year, more central banks are considering cutting rates. The European Central Bank is expected to take action on Thursday, and the central banks of Switzerland and Sweden have already shifted to more accommodative policies.

Doug Porter, chief economist at the Bank of Montreal, said in an interview, "There's safety in numbers." He said that if more central banks start cutting interest rates, the likelihood of currency pressure being concentrated in any particular country would be reduced.

Porter said, "If other central banks see their peers heading in this direction, it will give them some comfort that they haven't completely misread the situation. I think it does make it easier for other central banks to start cutting rates."

On Wednesday, the Bank of Canada lowered its benchmark overnight interest rate by 25 basis points to 0.75%, a move widely expected by markets and economists. But for a central bank governor known for caution, Macklem's unexpectedly dovish stance showed that he is increasingly confident that the worst of inflation is behind us. He said that further cuts would be reasonable if inflation continues to cool - and he pushed back on the question of whether the Bank of Canada is diverging from the Fed.

Currently, Canada's policy rate is 75 basis points below the upper limit of the Federal Reserve's rate. Macklem told reporters: "I think we're a long way from that limit, there's no clear boundary, and you can see from history that there have been periods of significant differences in interest rate policy between the Bank of Canada and the Fed."

Bank of Canada Deputy Governor Carolyn Rogers told the media that from 2021, central banks around the world face similar inflationary pressures as rising commodity prices and supply chain issues cause them to act roughly in unison, which is helpful because a large part of inflation is global."Although we're quite coordinated in our hikes, that's helpful for damping down global inflation. But you do see a differentiation in the cuts, and that makes sense."

Some economists were impressed by Macklem's confidence at this historic moment. After a shaky start to the tightening cycle, he appears to be on his way to beating inflation without triggering a deep recession.

But other analysts, including Derek Holt of the Bank of Nova Scotia, warned that the Bank of Canada runs the risk of being too confident. Holt said in a note to investors that Macklem's comments that Canada is "still a long way from the limit of divergence from the Federal Reserve" were an "overly aggressive" attitude.

Holt added that "Macklem is unusually indifferent about the exchange rate," and it appears that Macklem "will tolerate the exchange rate further weakening from its current level".

Macklem's tone and forward guidance have prompted Bank of Nova Scotia and other major banks to forecast more rate cuts in Canada this year than previously expected. However, when asked if he would cut rates again in July, Macklem said, "Let's enjoy this moment first."