–BOC: Governing Council to Mull If Rates Need to Rise Further Vs. Oct. View Rates Need to Rise Further
–BOC Repeats: Canadian Economy in Excess Demand, Labor Markets Tight
–BOC: Inflation Too High; 3-Month Core Measures Indicate Easing Price Pressures
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday raised its policy interest rate — the target for overnight lending rates — by 50 basis points to 4.25% from 3.75% in a seventh consecutive hike in the tightening phase that began in March aimed at bringing high inflation back to its 2% target.
At the same time, the central bank signaled that the phase of aggressive tightening is over, suggesting that its policy-making panel will decide whether to the bank will need to raise rates further at each meeting.
The decision followed remarks by Governor Tiff Macklem last month that the bank’s aggressive tightening mode is coming closer to an end but that its job to restore price stability is not done yet. The seven rate hikes in nine months totaling 400 basis points have jacked up the policy rate from its record low of 0.25%, which had been in place for two years until March 2.
The size of the latest rate hike was in line with the median economist forecast of 50 basis points, although some had expected a smaller 25-point increase.
At the time of the previous rate decision on Oct. 26, when the bank raised its policy rate by 50 basis points to 3.75%, the governor said the bank slowed the pace of hike from 75 basis points in September in light of clear signs of slowing economic growth in Canada.
The bank is scheduled to announce its next monetary policy decision on Jan. 25, when it also releases its latest medium-term GDP and CPI forecasts as well as risk analysis in its quarterly Monetary Policy Report. Many economists expect the bank to pause after today’s action while some anticipate a smaller 25-baisis point hike to wrap up the tightening phase.
Douglas Porter, chief economist at BMO Financial Group, who had accurately projected that the bank would go with a 50-basis point hike in December, said in a report after today’s rate hike that as economists and market participants debate the chances of a move at the Jan. 25 decision, “it’s already seen as a close call.”
“At this point, we would stick with our call of a terminal rate of 4.50% with one final 25 bp hike next month,” he wrote.
Avery Shenfeld, chief economist at CIBC Capital Markets, who had also forecast another 50-basis point rate increase in December, wrote after today’s action: “We see the overnight rate plateauing at this 4.25% level, but unlike what financial markets have been presuming in the last couple of weeks as bond yields tumbled, we expect the Bank of Canada to keep the overnight rate there through 2023, and ease only gradually in 2024.”
BOC PANEL TO MULL IF RATES NEED TO RISE FURTHER
“Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” the bank said in a statement.
That is a more cautious approach than the bank’s view expressed in its previous policy statement issued in October: “Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further.”
“Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding,” the bank said Wednesday, largely repeating its earlier statement.
“We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians,” the bank concluded. Its stance has softened from its preview statement in October: “We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.”
Deputy Governor Sharon Kozicki will deliver the Economic Progress Report at 1245 EST (1745 GMT) Thursday, followed by a fireside chat by Macklem at 1540 EST (2040 GMT) on Monday, Dec. 12.
Quantitative tightening that began in late April is “complementing increases in the policy rate,” the bank said, repeating its recent statement on unwinding emergency asset purchases that were aimed at reinforcing the effects of monetary easing during the early stage of the pandemic. The bank stopped reinvesting in government bonds and is letting its swollen balance sheet shrink in line with economic recovery from the pandemic-caused slump.
CANADA’S EXCESS DEMAND, TIGHT LABOR MARKET
The bank maintained is assessment, saying that “the economy continued to operate in excess demand” as the third-quarter GDP showed, and that “Canada’s labour market remains tight, with unemployment near historic lows.”
Data released last week showed employment slowed to a 10,100 rise in November after a 108,300 jump in October, but full-time jobs rose 50,700 and the private sector added 24,700 jobs. Wages gained 5.6% on year while the unemployment rate slipped to 5.1% from 5.2% the previous month.
While noting commodity exports have been strong, the bank also repeated its recent assessment that “there is growing evidence that tighter monetary policy is restraining domestic demand.” Consumption moderated in the third quarter, and housing market activity continues to decline, it said.
“Overall, the data since the October MPR (Monetary Policy Report) support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.”
SLOWING ECONOMIC GROWTH
The gross domestic product grew 0.7% in the July-September quarter for the fifth straight quarterly gain, but final domestic demand dipped 0.2% after a 0.6% rise in April-June, posting the first decline in five quarters. The weakness was seen in household spending, which slipped 0.3% for the first drop since April-June 2021.
The GDP expanded 2.9% at an annualized pace in the third quarter. It was stronger than expected but also slowed from 3.2% growth in the second quarter.
In monthly data, the GDP rose 0.1% in September. Statistics Canada’s initial estimate for October is for a flat reading, a sign that the economy is losing some steam amid rising borrowing costs and after the initial reopening demand has run its course.
In October, the bank revised down its 2022 economic growth forecast slightly to 3.3% from 3.5% in July, following a robust 4.5% gain in 2021. It halved its 2023 GDP growth forecast to 0.9% from 1.8% projected in July. The bank expects the domestic economy to grow 2.0% in 2024, revised down from its July forecast of 2.4%
INFLATION ‘STILL TOO HIGH’
The bank concluded in its policy statement that “inflation is still too high and short-term inflation expectations remain elevated.”
“The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched,” it warned.
But the bank also noted that three-month rates of change in core inflation have come down, “an early indicator that price pressures may be losing momentum.”
The governor has said that the next thing that the bank’s policymakers are looking for is “clear evidence of a more fundamental shift in underlying inflation.”
Canada’s latest CPI data released last month showed consumer inflation has eased but remains too high and broad for sustained economic growth.
The consumer price index rose 6.9% on the year in October, with the pace of increase steady from the rate in September. It is just under the bank’s latest projection of 7.1% for the October-December quarter.
The CPI jumped 0.7% on the month in October after a 0.1% gain in September, largely driven by a 9.2% rebound in gasoline prices after a 7.4% dip the previous month. Food prices remain well above year-earlier levels, although the pace of increase decelerated slightly to 10.1% in October from 10.3% in September. The aggressive tightening by the bank led mortgage interest costs surge 11.4% on year, the highest increase since February 1991, when they rose 11.7%.
Excluding food and energy, consumer prices rose 5.3% from a year earlier in October, easing slightly from a 5.4% rise in September.
By contrast, two of the BOC’s core inflation measures inched up. The year-over-year increase in the CPI trim was 5.3% in October, up from 5.2% in September, while the annual rate in the CPI median rose to 4.8% from 4.7%. Those measures strip out whatever is volatile at the time.
Inflation in Canada measured by the total CPI has moderated from a recent peak of 8.1% hit in June to 6.9% but it is still well above the central bank’s 2% target.
In its quarterly Monetary Policy Report released in October, the bank revised down its consumer inflation outlook for 2022 to 6.9% from 7.2% projected in July, but that would be still much higher than the 3.4% rise in 2021. The bank also lowered its CPI forecast for 2023 to 4.1% from 4.6% forecast three months earlier.
As for the CPI in 2024, the bank forecast the annual inflation rate will come closer to its 2% target, at 2.2%, compared to 2.3% forecast in July.
RATE HIKES FRONT-LOADED
The bank has front-loaded credit tightening, hoping to prevent high inflation from becoming entrenched, which would make it harder for the bank to bring it down without causing recession. That phase is coming to an end as the bank’s policy rate, now at 4.25%, stands well above its latest estimate for the nominal neutral interest rate in a range of 2% to 3%.
In the current tightening cycle, the move to jack up the policy rate by 100 bps to 2.5% in July was the biggest increase since 1998. Earlier, the bank conducted a 50-basis point increase each in June and April and a 25-basis point rise in March, which was the bank’s first interest rate hike since October 2018 by lifting the key rate to 0.5% from its record low 0.25%.
The bank has far more than unwound its emergency three rate cuts totaling 150 basis points conducted in March 2020 during the first wave of the global pandemic, which lowered the policy rate to 0.25% from 1.75%, a level that had been maintained for over a year since it was raised from 1.50% on Oct. 24, 2018.