–BOC: Will Continue Assessing Economic Developments, Effects of Cumulative Tightening
–BOC: Labor Markets ‘Very Tight,’ Employment Growth ‘Surprisingly Strong’
–BOC Keeps View Inflation to Slow to 3% in Mid-2023 but Says Needs to Come Down Further
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday left its policy interest rate — the target for overnight lending rates — at 4.50%, as widely expected, but stressed that it is not lowering its guard against upside risks to inflation as labor market conditions remain “very tight” and consumer spending is resilient.
While cumulative effects of monetary policy tightening are slowing growth in Canada and elsewhere and commodity prices have evolved roughly in line with the bank’s expectations, “the strength of China’s recovery and the impact of Russia’s war in Ukraine remain key sources of upside risk,” the bank said.
“Based on its assessment of recent data, Governing Council decided to maintain the policy rate at 4.50%. Quantitative tightening is complementing this restrictive stance,” the bank said, indicating that its policy bias is still toward tightening.
“Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target,” it concluded.
The message is largely the same as in January but the wording left the impression that the bank is leaving its options open. In the January statement, the bank said, “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. Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target.”
“The bank seems to have subtly loosened any commitment to stay on pause, as the forward-looking language simply refers to the need to continue to ‘assess economic developments’,” Douglas Porter, chief economist at BMO Financial Group, said in a commentary.
“Clearly, the bank wants to keep its options open if inflation doesn’t go their way and/or if the job market continues to sizzle,” he said. “Of course, the much more hawkish message from the Fed, and the related drop in the Canadian dollar, has heightened the need for optionality.”
At its previous policy announcement on Jan. 25 and ensuing official comments, the bank indicated that it was pausing in tightening on condition that growth and inflation move in line with its predictions.
It raised the policy rate for the eighth consecutive time in January with a 25-basis-point hike in the tightening phase that began in March aimed at bringing high inflation back to its 2% target. The pace was slower than 50 bps in December and October, 75 bps in September and 100 bps in July.
Governor Tiff Macklem has repeatedly said that it is a “conditional pause” and that the bank will be prepared to raise rates further if it believes it is necessary to do so to get inflation back to target.
The bank is scheduled to announce its next monetary policy decision on April 12 and release its latest economic projections in the quarterly Monetary Policy Report.
BOC Continues to Sees 3% Inflation in Mid-2023
“Overall, the latest data remains in line with the bank’s expectation that CPI inflation will come down to around 3% in the middle of this year,” the bank said.
“Year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3.5%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.”
Canada’s latest CPI data showed consumer inflation has decelerated further, reflecting softer energy and commodity markets and easing supply bottlenecks, but remains too high for sustainable economic growth.
The consumer price index rose 5.9% on year in January, slowing from 6.3% in December, 6.8% in November and a recent peak of 8.1 percent in June 2022.
Prices for cellular services and passenger vehicles contributed to the deceleration in the total CPI while mortgage interest cost and prices for food continued to rise.
Two of the BOC’s core inflation measures have eased slightly. The year-over-year increase in the CPI-trim was 5.1% in January, down from 5.3% in December, but it is still well above 4.1% a year earlier. The annual rate in the CPI median edged down to a five-month low of 5.0% from 5.2% in December. Those measures strip out whatever is volatile at the time.
But the bank said food and shelter costs remain high, “causing continued hardship for Canadians.”
Looking ahead, it said, “With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.”
Very Tight Labor Market Conditions
As in the U.S., inflationary pressures are coming from sticky service prices, reflecting rising labor costs and worker shortages in some sectors.
Employment jumped 150,000 (up 0.8%), mostly in full-time work, in January, and the unemployment rate held steady at 5.0%, just above the record low of 4.9% reached in June and July last year.
“The labour market remains very tight,” the bank noted. “Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated. Wages continue to grow at 4% to 5%, while productivity has declined in recent quarters.”
Slowing but Resilient Economic Growth
In the latest monthly data, Canada’s economic growth was flat in the October-December quarter after the gross domestic product grew 0.7% in July-September for the fifth straight quarterly gain.
“With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment,” the bank said. “
“Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.”
GDP edged down 0.1% on the month in December after a 0.1% uptick in November, but advance information indicates that GDP rebounded 0.3% in January, according to Statistics Canada.
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, 2022. 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%.
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.
Through “quantitative tightening” that began in April 2022, the bank has been unwinding emergency asset purchases that were aimed at reinforcing the effects of monetary easing during the early phase 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.