By Max Sato
(MaceNews) – The Bank of Canada is widely expected by economists to slow the pace of its tightening, raising its short-term interest rate target by 25 basis points to 4.50% on Wednesday after conducting more aggressive hikes in 2022, then take a pause for the rest of the year as inflation eases and economic growth loses steam.
It would be an eighth consecutive hike in the tightening phase that began in March aimed at bringing high inflation back to its 2% target. The bank has slowed its rate-hike pace from 100 bps in July, 75 bps in September and 50 bps in both October and December. Last month, it signaled that the phase of aggressive tightening was over and suggested that its policy-making panel would decide
whether to the bank will need to raise rates further at each meeting.
“Beyond Wednesday, we expect the BOC to stay on the sidelines for the rest of the year, before returning policy to more neutral levels starting early next year,” Sal Guatieri, senior economist at BMO Capital Markets said. “This assumes inflation continues to moderate and the labour market loosens, with the jobless rate trending above 6% by year-end.”
The Bank of Canada will release its policy decision as well as the quarterly Monetary Policy Report at 10:00 EST (1500 GMT) on Wednesday. In its last report issued in October, the bank projected that economic growth in Canada would essentially stall later in 2022 and through the first half of 2023.
Data released earlier this month indicated the domestic labor market remains tight. Employment surged by 104,000 in December, well above expectations, and the unemployment rate declined 0.1 percentage point to 5.0%, just above the record low of 4.9% reached in June and July last year. Canada’s latest CPI data released last week showed consumer inflation has decelerated further, reflecting softer commodity markets and easing supply bottlenecks, but remains too high for sustainable economic growth, and the bank’s core measures are sliding only slowly.
The Consumer Price Index rose 6.3% on year in December, decelerating from 6.8% in November and 6.9% in October and a recent peak of 8.1 percent in June 2022, led by smaller gains in the prices for gasoline and durable goods, but it is still well above the bank’s 2% target. Two of the BOC’s core inflation measures eased only slightly. The year-over-year increase in the CPI trim was 5.3% in December, down from 5.4% in November, but was the same as 5.3% in October. The annual rate in the CPI median edged down to 5.0% in December from 5.1% the previous month while it was slightly above 4.9% in October. Those measures strip out whatever s volatile at the time.
“We expect inflation to moderate steadily, with the yearly CPI rate falling to around 3% at year-end,” Guatieri said. “We also anticipate a mild contraction in the economy in the first half of the year, before growth resumes in the second half. Falling inflation and a shallow recession should discourage further rate hikes this year.”
In its October report, 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, when it slashed its forecast from 3.2% in April. The bank expects the domestic economy to grow 2.0% in 2024, revised down from 2.4% projected in July.
In the latest monthly data, the GDP edged up 0.1% in October, following a 0.2% uptick in September. Growth in services-producing industries (up 0.3%) was partially offset by a decline in goods-producing industries (down 0.7%). Statistics Canada’s initial estimate for November is for a 0.1% gain, indicating some resilience amid higher borrowing costs. 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. Sentiment among companies in Canada declined for the fourth straight quarter in October-December as rising interest rates and the possibility of a recession this year are dampening sales expectations and plans to invest while high inflation is
eroding consumers’ spending power, the Bank of Canada’s quarterly Business Outlook Survey released last week showed.
In response to high inflation and rising interest rates, consumers have reduced their purchases of a broad range of goods and services, according to the bank’s quarterly Canadian Survey of Consumer Expectations, which was released at the same time.
“Most consumers expect a mild to moderate recession in Canada within the next 12 months,” the bank said. “Of respondents who indicated a recession would affect them, a majority anticipate they would have difficulty paying bills or would face other financial impacts. However, less than one-sixth of respondents who expect to be affected by a recession anticipate losing their job.”
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Contact this reporter: max@macenews.com
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