–Governing Council Still Concerned About Inflationary Risks, Particularly Persistent Underlying Price Pressures
–BoC Statement Stops Saying It Remains Prepared to Hike Policy Rate Further if Needed
–Governor Macklem: Premature to Discuss Lowering Interest Rates
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday maintained its policy interest rate — the target for overnight lending rates — at 5.0% for the fourth straight meeting, as expected, but softened its hawkish tone amid sluggish economic growth while repeating its warning that underlying inflation is persistent and wage growth is high.
The bank said it is also continuing its policy of quantitative tightening to trim the bank’s balance sheet to a normal level.
“Governing Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” the bank said. “Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”
“Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth,” the bank said, more or less repeating its December assessment. “However, wages are still rising around 4% to 5%.”
In his opening remarks at a news conference, Governor Tiff Macklem said recent fluctuations in inflation mean further declines are likely to be “gradual and uneven,” which in turn suggests the path back to our 2% target will be “slow, and risks remain.”
“Governing Council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance,” Macklem said. “That doesn’t mean we have ruled out further policy rate increases,” he said. “If new developments push inflation higher, we may still need to raise rates.”
BoC Has Raised Rates Enough but Needs to Let Tightening Work Further
In response to questions, the governor repeated his recent remark that “it is premature to discuss lowering interest rates” and that bank officials need to see “continued evidence” that inflation is easing in order to start debating for a rate cut. The bank’s core inflation measures are still showing a 3.5% to 4% increase, he noted.
The governor also said the bank has not reached the point yet to consider ending quantitative tightening and resuming asset purchases to maintain the balance sheet at a certain level.
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. The bank will announce its next policy decision on March 6.
Asked whether there was any opinion calling for a rate cut at today’s meeting, Macklem said, “With respect to the decision about what to do this morning, the focus across the council was very much on holding .… Monetary policy is working but we need to let it keep working, and in that regard, we had a clear consensus to hold at the current policy rate.”
The governor said the bank’s latest forecast “has increased our confidence that we have raised the policy rate enough to get inflation back to the 2% target.”
The bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. “While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines,” the bank said.
The BoC raised its target for overnight lending rates by a total of 475 basis points (4.75%age 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%.
Canadian Economy Stalling but Governor Sees No Deep Recession
“In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024,” the bank said. “With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply.”
“Economic growth is expected to strengthen gradually around the middle of 2024,” it said.
Macklem said around zero economic growth forecast could mean small positives or negatives but added, “We are not forecasting a deep recession. We don’t think we need a deep recession to get inflation back to target but we do need this period of weak growth.”
The Canadian economy contracted 0.3% on quarter, or an annualized 1.1%, in the July-September quarter, led by declines in business investment and net exports as well as sluggish consumer spending. 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.
For the whole year, the bank revised down its 2023 GDP growth forecast to 1.0% from 1.2% projected in October while revising down its 2024 growth forecast slightly to 0.8% from 0.9%. The bank forecast Canada’s economic growth will pick up to 2.4% in 2025, revised down slightly from its estimate of 2.5% made three months ago.
By contrast, the bank revised up its forecast for the U.S. economic growth to 2.5% from 2.2% for 2023 and 1.7% from 0.8% in 2024 while leaving its estimate for 2025 unchanged at 1.2%. This supports Canadian exports but consumption, which is the biggest factor in Canada’s GDP, is slowing amid high costs, and thus should help lower domestic inflation, Macklem said.
Asked if optimistic views in many stock markets based on some resilience in the U.S. economy are positive for supporting Canadian growth or work against the bank’s efforts to bring inflation back to 2%, Macklem said, “I expect inflation will be coming down and growth will be picking up, and as we gain the assurance that inflation is coming down, we can talk about lowering interest rates. So, yes, there is certainly room for optimism.”
Lingering Underlying Inflationary Pressures
The bank’s latest consumer inflation outlook for 2023 is 3.9%, unchanged from its previous projection. The consumer price index surged 6.8% in 2022 after a 3.4% rise in 2021. As for the CPI in 2024, the bank forecast the annual inflation rate will remain above the target at 2.8% but slightly lower than 3.0% projected in October. The bank’s CPI estimate for 2025 is unchanged at 2.2%.
The governor said bank officials are monitoring the persistence in underlying inflation, which is “more of a concept than a measure” and reflects many factors, such as the bank’s own core inflation measures, prices excluding energy and the number of items whose prices are still rising more than 3% on year.
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 remain sticky. 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.