A rapid pivot to lower rates would cheer borrowers, lift valuations, and take some strain off rate sensitive corners of the economy. It would also arrive while inflation is still running above the 2% target.
Easing financial conditions too fast can revive demand before supply side healing has fully restored balance, which risks a fresh round of price pressure that is harder to arrest.
Cheaper credit encourages households and businesses to accelerate spending that had been deferred. Mortgage refinancing picks up, auto sales improve, and corporate issuance rebounds.
Labor markets that were cooling can tighten at the margin as hiring plans unfreeze. Those feedback loops are the reason central banks waited for clear evidence of slowing inflation before the last cycle of hikes ended.
If companies and workers come to believe that inflation will stick above target, the next wage round and the next price list tend to reflect that view.
This raises the odds that policymakers need to slam the brakes again, which is more damaging to growth and employment than a steadier glide path now.
The current backdrop is not a replay of the 1970s, but the caution from that period still applies when the last mile is uncertain.
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A swift series of cuts would likely amplify that move by lowering discount rates and encouraging multiple expansion.
The result could be financial conditions that ease more than central banks intend while core services inflation remains sticky.
The Bank of Canada must weigh weaker growth against persistent shelter costs and firm wages. The tug of war was visible when the TSX stalls near a record as investors watched for guidance on the pace of disinflation and the path of policy.
A synchronized rush to easier settings in North America would add fuel to housing demand and credit growth that feed into measured inflation with a lag.
The transmission into official inflation data is not instantaneous that lag is a reason to be careful. Cutting too quickly risks a rebound in the shelter components just as headline inflation approaches more comfortable territory.
If quantitative tightening slows or reserves build, funding becomes easier and market plumbing hums.
A recent episode where repo market strains in Canada flash during balance sheet shifts shows how sensitive the system can be to technical changes.
