–BOC Changes Stance from December View of Mulling If Rates Need to Rise Further
–BOC Repeats: Canadian Economy in Excess Demand, Labor Markets Tight
–BOC Revises Down 2023 CPI Forecast, Sees Modest GDP Growth
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday raised its policy interest rate — the target for overnight lending rates — by 25 basis points to 4.50% from 4.25%, as expected, in an eighth consecutive hike in the tightening phase that began in March aimed at bringing high inflation back to its 2% target.
The central bank is expected by economists to hold its policy stance steady for now after signaling last month that the phase of aggressive tightening is over and suggesting that its policy-making panel will decide whether to the bank will need to raise rates further at each meeting.
The bank is scheduled to announce its next monetary policy decision on March 8.
“With persistent excess demand putting continued upward pressure on many prices, Governing Council decided to increase the policy interest rate by a further 25 basis points,” the bank said in a statement.
“If economic developments evolve broadly in line with the MPR (Monetary Policy Report) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” it said.
It is a clear change in the bank’s stance from its previous statement issued on Dec. 7 that said, “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.”
In its latest assessment of inflationary pressures, the bank said, “Short-term inflation expectations remain elevated. Year-over-year measures of core inflation are still around 5%, but 3-month measures of core inflation have come down, suggesting that core inflation has peaked.”
At the same time, the bank’s policymakers are trying to calm expectations in financial markets that the BOC will ease policy later this year.
“Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians,” the bank said.
The eight rate hikes in 11 months totaling 425 basis points have pushed up the policy rate from its record low of 0.25%, which had been in place for two years until March 2. The current policy rate stands well above the bank’s latest estimate for the nominal neutral interest rate in a range of 2% to 3%.
“We look for no moves through the remainder of 2023, with cuts developing in early 2024,” said Douglas Porter, chief economist at BMO Financial Group. “We expect growth to stall in the first half, and a modest backup in the jobless rate.”
“Inflation is expected to fall relatively hard through the spring (from late March until mid-June) as the base effects turn very friendly and underlying price pressures recede as growth cools,” he said. “However, our view is that inflation may prove to be a bit stickier than expected, and that it will remain still too high for the bank’s comfort, right until the end of the year — thus delaying cuts until the next year.”
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.
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.
BOC Revises Down 2023 CPI Forecast, Sees Modest GDP Growth
“Ongoing excess demand in the economy continues to exert upward pressure on prices,” the bank said in the report. “But, with lower energy prices, improvements in global supply chains and the effects of higher interest rates moving through the economy, inflation has started to ease.”
CPI inflation is forecast to fall to 3% in mid-2023 and return to the 2% target in 2024. Inflation in 2023 is anticipated to be lower than projected in the October Report, mainly due to gasoline prices dropping more than expected and global supply chains improving more quickly than anticipated, the bank said.
As for the CPI in 2024, the bank forecast the annual inflation rate will come closer to its 2% target, at 2.3%. The forecast is little changed from 2.2% predicted about three months ago and 2.3% projected in July and 2.2% in April.
“Economic growth is projected to slow at the end of 2022 and to stall through the middle of 2023,” the bank predicted.
“The tightening of monetary policy initially slowed housing activity followed by consumer demand for durables in the middle of 2022,” it said. “The effects of the rise in interest rates are expected to broaden and moderate consumer spending on services as well as investment spending in 2023.” Growth is then projected to pick up in late 2023.
As recent economic data points to resilient domestic economic activity despite rising borrowing costs, the bank revised up its 2022 economic growth forecast to 3.6% from 3.3% projected in October, 3.5% in July and 4.2% in April, following a robust 5.0% gain in 2021.
It raised its 2023 GDP growth forecast slightly to 1.0% after slashing it to 0.9% in October from 1.8% in July, when it revised down its forecast from 3.2% in April. The bank expects the domestic economy to grow 1.8% in 2024, below its projections of 2.0% in October, 2.4% in July and 2.2% in April.
Canada Still in Excess Demand, Labor Markets Remains Tight
The bank maintained is assessment that the economy remains in excess demand, labour markets are still tight, with the unemployment rate near historic lows.
But it also noted that “there is growing evidence that restrictive monetary policy is slowing activity, especially household spending.” As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow, the bank said.
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.
Slowing but Resilient Economic Growth
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.