–Governing Council Likely to Remain Concerned About Inflationary Risk
–Governor Macklem Has Repeatedly Said It is Too Early to Discuss a Rate Cut
By Max Sato
(MaceNews) – The Bank of Canada is widely expected to maintain its policy interest rate — the target for overnight lending rates — at 5.0% on Wednesday for the fourth straight meeting while bank officials monitor the effects of their past rate hikes to bring inflation back to its 2% target without hurting economic activity.
The bank is also expected to make no or little change to its stance of continuing quantitative tightening to trim the bank’s balance sheet to a normal level.
In its last rate announcement in December, the central bank’s policy board said it was “still concerned” that inflation may stay above its 2% inflation target, keeping its hawkish tone that it “remains prepared” to hike rates if needed. The bank has been trying to cool off expectations of an early rate cut and speculative investment in the housing and other markets, and thus it is likely to continue expressing its concerns.
Economists expect the bank will wait until mid-2024 to consider lowering interest rates, with the earliest forecast for April, when the bank will provide its medium-term economic forecasts and risk analysis in the next quarterly report.
Governor Tiff Macklem said in a speech last month that bank officials were “doing our best to balance the risks of over- and under-tightening” and repeated that “it’s still too early to consider cutting our policy rate.”
“Until we see evidence that we are clearly on a path back to 2% inflation, I expect Governing Council will continue to debate whether monetary policy is restrictive enough and how long it needs to remain restrictive to restore price stability,” he said on Dec. 15. The upward pressure from services costs remains high, largely due to elevated mortgage rates, a result of the bank’s aggressive rate hikes in 2022 and gradual rises in 2023.
In Wednesday’s statement, the bank is expected to repeat that the policy board “continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”
The BoC raised its target for overnight lending rates by a total of 475 basis points (4.75 percentage points) between March 2022 and July 2023, jacking up the key rate through 10 increases from its record low of 0.25% to a 22-year high of 5%.
The bank will announce its following policy decision on March 6.
In December, the bank said: “The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly.” But it also noted wages were still rising by 4% to 5%.
Canada’s CPI data has been fluctuating month to month. Overall consumer inflation picked up to 3.4% in December after being stable at 3.1% in November and easing to the rate in October from 3.8% in September. It had moderated to 2.8% in June 2023, which was the lowest since 2.2% in March 2021 and a sharp drop from a recent peak of 8.1% hit in June 2022.
The BoC’s core inflation measures indicated stickiness. The year-over-year increase in the CPI trim rose to 3.7% in December from 3.5% in November. The annual rate of the CPI median stayed at 3.6%. Those measures strip out whatever is volatile at the time.
The Canadian labor market has softened. Employment was flat (up just 100) in December after rising 24,900 in November while the unemployment rate was unchanged at 5.8% after drifting up from 5.0% at the start of 2023. But the year-over-year increase in average hourly wages accelerated to 5.4% in December from 4.8% in November, showing continued inflationary pressures.
The Canadian economy contracted 0.3% on quarter, or an annualized 1.1%, in the July-September quarter, much weaker than the consensus call of an annual 0.1% rise. April-June GDP was revised up sharply to 0.3% growth on quarter from being flat (-0.0%), or to an annualized 1.4% expansion from a 0.2% drop. The third quarter slump was led by declines in business investment and net exports as well as sluggish consumer spending.
In the latest monthly GDP data, the economy was flat for the third straight month in October, coming in weaker than Statistics Canada’s advance estimate of a 0.2% increase. The flash estimate for November is a slight 0.1% rise.