The Bank of Canada’s top official said policymakers will consider cutting interest rates when inflation is “clearly” on a path to the 2 per cent target, but added that it’s still “too early.”

In a speech Friday, Bank of Canada Governor Tiff Macklem said that once officials are assured that price pressures are on a sustained downward track, they “will be considering whether and when we can lower our policy rate.”

“I know it is tempting to rush ahead to that discussion. But it’s still too early to consider cutting our policy rate,” Macklem said in Toronto.

Answering questions from reporters after the speech, Macklem reiterated that governing council is still prepared to hike borrowing costs further if needed, but noted that officials increasingly view interest rates as high enough to bring inflation to heel.

“The members did agree that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased,” Macklem said. In his speech, he noted that his six person rate-setting council is also discus

sing how long interest rates need “to remain restrictive to restore price stability.”

After Macklem’s speech, bond yields fluctuated before eventually climbing, with the 2-year benchmark note trading about 5 basis points higher at 3.953 per cent as of 3:20 p.m. Ottawa time. Traders in overnight swaps pared bets for an April rate cut, but continue to price over 100 basis points of easing by October 2024.

While further declines in price pressures will likely be “gradual,” Macklem said that inflation will be “getting close to the 2 per cent target” by the end of next year, adding that “conditions increasingly appear to be in place to get us there” and that “underlying inflation pressures are easing in much of the economy.”

 “The bank is comfortable that policy rates are now tight enough to quell inflation,” said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities, in a report to investors. “Central bank messages have short shelf lives at the best of times. It may only take a month or two of soft data for the Bank of Canada to actually start considering rate cuts.”

Macklem also acknowledged that the central bank’s rate hikes are contributing to higher shelter inflation, which is currently one of the main upside contributors to headline inflation in Canada.

Last week, the Bank of Canada held interest rates at 5 per cent for a third straight meeting. Speaking to reporters a day after the Dec. 6 decision, Deputy Governor Toni Gravelle reiterated to reporters the central bank was “not even thinking about cutting rates.”

Macklem’s comments reinforce that the Bank of Canada is at least starting to consider when to begin lowering interest rates, adding to a growing list of central bankers changing their views on how their monetary policy stance should normalize next year.

On Wednesday, the Federal Reserve held borrowing costs steady, but dot plot forecasts showed broader consensus for rate cuts in 2024. In a subsequent press conference, Chair Jerome Powell indicated policymakers are now turning their focus to when to cut rates as inflation continues its descent toward their 2 per cent goal, prompting a sustained bond rally and stock market optimism.

But Europe’s central bankers aren’t ready to join the pivot. Yesterday, European Central Bank President Christine Lagarde said the bank had not discussed rate cuts at all, saying “we should absolutely not lower our guard.” The same day, her Bank of England counterpart, Andrew Bailey, observed that “there is still some way to go” in the fight to tame consumer prices.

Canada’s heavily indebted households hold shorter-duration mortgages that roll over more quickly than those held by their U.S. counterparts, a big reason why economists see the northern nation as more sensitive to higher borrowing costs.

The Bank of Canada next sets rates on Jan. 24.