–BoC: Excess Supply Lowers Inflationary Pressures but Shelter, Some Other Services Holding Inflation Up
–Governor Macklem: Downside Risks Taking on Increased Weight in Monetary Policy Deliberations
–Macklem: Need Growth to Pick Up So Inflation Does Not Fall Too Much, Even as We Work To Get Inflation Down To 2% Target
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday lowered its policy interest rate — the target for overnight lending rates — by another 25 basis points to 4.50%, as widely expected, to help ease the pain of its earlier rapid credit tightening on households and businesses after delivering its first rate cut in more than four years in June.
The bank left its door open for more interest rate cuts so that the cumulative effects of past rate hikes do no chill economic activity more than necessary. Recent data have shown no slack in the economy and the labor market is not catching up with population growth boosted by Canada’s strong immigration policy.
The bank also decided to continue its policy of quantitative tightening to trim the bank’s balance sheet to a normal level. The process is likely to end sometime next year when the bank will resume normal purchases of government bonds.
“Ongoing excess supply is lowering inflationary pressures,” the bank said in a statement. “At the same time, price pressures in some important parts of the economy — notably shelter and some other services — are holding inflation up.
Governing Council is carefully assessing these opposing forces on inflation.”
“Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook,” the bank said.
In his opening remarks at a news conference, Governor Macklem sounded more dovish than last month, saying, “With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations.”
“We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2% target,” he said.
Looking ahead, the governor said, “If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate.” The bank’s policymakers “will be taking our monetary policy decisions one at a time,” he said and repeated several times throughout the news conference that “we are taking one meeting a time.”
Economists continue to expect the bank to cut internet rates two more times to bring the policy rate to 4% before the end of the year. The BoC’s next rate announcements are scheduled for Sept. 4, Oct. 23 and Dec. 11.
On risk analysis, the governor told reporters, “We need to be more symmetric once again in our treatment of the risks .…We are equally concerned about being below target as we are being above target.” But he also clearly stated that “we don’t need more excess supply.”
“As always, there are risks around our inflation outlook,” Macklem said. “Globally, geopolitical uncertainty is high. Here in Canada, the biggest downside risk is that household spending could be weaker than expected. On the upside, inflation in shelter and other services could prove more persistent.”
In its quarterly Monetary Policy Report also released on Wednesday, the bank assessed the impacts of newcomers on the Canadian economy and inflation. “The effects on overall supply and demand from increased population growth are expected to largely offset each other over the medium term,” it said. “However, because newcomers affect demand sooner than supply, this unevenness contributes to inflationary pressures in some sectors. In particular, there are additional upward pressures on house prices and rents.”
On the housing market imbalance amid affordable home shortages, Senior Deputy Governor Carolyn Rogers said a rate cut by the bank has an immediate effect of lowering mortgage costs, but there are other factors that are driving shelter inflation higher, including rent, insurance, tax and maintenance. “It would a mistake to pin all of our hopes on our housing imbalance on interest rates,” she said. “Canadians need a more fulsome, more coordinated response that that.”
The governor was also asked about the fact that when central banks raise interest rates rapidly or maintain restrictive policy to bring inflation back to target, it tends to worsen the inequality between the high and the middle to lower income earners.
“Inflation disproportionally affects poor people,” he said, adding that low-income earners have small saving buffers and reminding of a recent spike in food prices and rend. “These are necessities. You can’t cut back on necessities,” he said.
“So, the best monetary policy can do for all Canadians is to get inflation down and that’s particularly important for low-income Canadians,” he said. “But monetary policy is a broad macro policy: We don’t have the ability to target individual groups, individual sectors with different interest rates or different rates of inflation, growth. Fiscal policy really is the tool that has the ability to target different groups.” He didn’t call for special fiscal policy response.
Asked if there was any discussion for a bigger 50-basis point cut in the policy rate among Governing Council members leading to today’s announcement, Macklem replied, “There was a clear consensus to cut 25 basis points. There was a clear consensus that the expected path of the policy rate is lower but we are not on a predetermined path, we are taking one meeting a time.”
On the question of limits on how far Canada can diverge from the U.S. in terms of monetary policy without disrupting financial markets or the real economy, Macklem said that “we are still not close to those limits,” repeating his comments made last month. In theory, rate cuts by the BoC in the absence of Fed easing could lead the Canadian dollar to depreciate against the U.S. currency and thus could provide an unnecessary stimulus to the Canadian economy by making exports cheaper and could push up import costs.
The bank expects its preferred measures of core inflation (average of CPI-trim and CPI-median) to slow to about 2.5% in the second half of 2024 and ease further in 2025. “CPI inflation is forecast to come down below core this fall and settle sustainably around the 2% target next year, but it’s unlikely to be a straight line,” Macklem said.
Two of the BoC’s core inflation measures, based on the CPI report, showed the road to the bank’s 2% target remains bumpy. The year-on-year increase in the CPI trim stood at 2.9% in June, unchanged from May, when it rose from 2.8% in April, while the annual rate of the CPI median eased slightly to 2.6% after rising to a revised 2.7% in May from 2.6% in April. Those measures strip out whatever is volatile at the time.
The annual inflation rate eased back to 2.7% in June, mainly driven by lower gasoline prices, after unexpectedly rising to 2.9% in May from a three-year low of 2.7% hit in April. Employment fell 1,400 in June versus a consensus call of a 21,300 gain after rising 27,000 in May while the unemployment rate rose to 6.4% from 6.2%, up 1.3 percentage points since April 2023.
The bank’s quarterly Business Outlook Survey released last week also showed sentiment among companies in Canada remains more pessimistic than average in April-June as continued weak demand and high borrowing costs have discouraged capacity expansion and also led to easing labor conditions and lower near-term inflation expectations among firms and consumers.
The latest policy decision follows the action in June, which was the first interest rate cut by the bank since March 2020 but also left monetary policy “restrictive” to economic activity, and thus differs from three emergency rate reductions, from 1.75% to 0.25%, at the early phase of the pandemic when demand plunged across the world. The bank is in the process of gradually unwinding the 10 rate hikes totaling 475 basis points that it conducted between March 2022 and July 2023, taking the overnight rate to a 22-year high of 5% from its record low of 0.25%.
Boc Revises Down GDP Forecast for 2024, Still Sees Pickup in 2025
In the Monetary Policy Report, the bank forecast that Canada’s GDP would grow 1.5% at an annualized pace in the April-June quarter (data due on Aug. 30), unchanged from its 1.5% growth projected in April. Its first estimate for July-Septmeber GDP is a much higher 2.8% rise.
The economy rose 0.3% on the month in April after no change in March, making a solid start to the April-June quarter. Statistics Canada’s early estimate for May is a 0.1% gain. In the first quarter, real GDP grew 0.4% on quarter, or an annualized 1.7%, below the consensus forecast of a 2.3% rise and the BoC’s April projection of 2.8%. The annualized growth rate in the previous quarter was revised down to no growth from a 1.0% rise, averting two consecutive quarters of contraction
This has led the bank to revise down its 2024 GDP growth forecast to 1.2% from 1.5% projected about three months ago. The bank expects the economic growth to accelerate to 2.1% in 2025, but it was revised down slightly from its previous forecast of 2.2%. Its estimate for 2026 is 2.4% growth, revised up from 1.9% forecast in April.
BoC Sees Inflation Drift Down to 2% Target Toward End of 2025
The bank’s latest consumer inflation outlook for 2024 is 2.6%, unchanged from its previous projection of 2.6%. The consumer price index rose 3.9% in 2023 after soaring 6.8% in 2022 and rising 3.4% in 2021.
As for the CPI in 2025, the bank forecast the annual inflation rate will remain above the target, at 2.4%, revised up from 2.2% projected in April. The bank’s CPI estimate for 2026 is 2.0%, revised down slightly from 2.1%.