By Max Sato
(MaceNews) – The Bank of Canada is widely expected to hold its policy interest rate steady for a third straight meeting on Wednesday in the face of sluggish GDP data and an uptick in unemployment.
But BOC policymakers are also expected to warn against being complacent about the risk of prolonged inflation as the process toward the bank’s 2% target has been slower than they wish.
There is no news conference by BOC officials after the rate announcement at 1000 EST (1500 GMT) on Wednesday but Deputy Governor Toni Gravelle will deliver a speech on the economic progress report at the Windsor-Essex Regional Chamber of Commerce in Ontario at 1235 EST (1735 GMT) and hold a news conference at 1410 EST (1910 GMT) on Thursday.
Governor Tiff Macklem said in a speech last month that the bank’s policy interest rate may be “restrictive enough” to bring inflation back to 2% but also noted there is no clear evidence yet that underlying inflation is on a downtrend. The upward pressure from services costs remains high, largely due to elevated mortgage rates, a result of the bank’s aggressive rate hikes last year.
After the speech, the governor told reporters that the bank’s policy stance is not pre-set and there is still an upside risk to prices. He said the bank’s policymakers are “concerned” that short-term inflation expectations among households and businesses are coming down only slowly.
“We need to see sustained evidence that underlying inflation is coming down to be more confident,” he said. “Underlying inflation is running at 3% and if we see that persist, that is still well above the target. There may be a need for higher interest rates.”
Canada’s CPI data has shown volatility. Overall consumer inflation eased to 3.1% in October from 3.8% in September after accelerating to 4.0% in August from 3.6% in July on higher energy prices. It had slowed to 2.8% in June, 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.
“What we are looking at is underlying inflation; we particularly use the core measures to look at that,” the governor said. “They’ve been running for the last number of months at 3.5 to 4(%).”
Two of the BOC’s core inflation measures have eased slightly. The year-over-year increase in the CPI trim decelerated to 3.5% in October from 3.7% in September and 3.9% in August. The annual rate of the CPI median also slowed to 3.6% in October from 3.8% in September and 4.1% in August. Those measures strip out whatever is volatile at the time.
No change in policy Wednesday would follow a pause in both October and September, a 25-basis point hike each in July and June, a conditional pause in April and March and an eighth consecutive increase in January. The BOC has raised its target for overnight lending rates by a total of 475 basis points (4.75 percentage points) since March 2022, jacking up the key rate through 10 increases from its record low of 0.25%.
Data released on Friday showed the Canadian labor market is showing some softening.
Employment rose an above-forecast 24,900 in November, led by a jump in full-time jobs, following increases of 17,500 in October and 63,800 in September, while the unemployment rate edged up to 5.8% from 5.7% in October and 5.5% in September. The year-on-year increase in average hourly wages was steady at 4.8% in November after easing in October from 5.0% in September.
Thursday’s GDP data pointed to flat growth in the six months to September.
The Canadian economy contracted 0.3% on quarter, or an annualized 1.1% in the July September quarter, much weaker than the consensus call of an annual 0.1% rise. April-June GDP was revised up sharply to 0.3% growth on quarter from being flat (-0.0%), or to an annualized 1.4% expansion from a 0.2% drop. The third quarter slump was led by declines in business investment and net exports as well as sluggish consumer spending.
In the monthly GDP data, the economy grew 0.1% on the month in September and Statistics Canada’s advance estimate for October is a surprisingly upbeat 0.2% increase, indicating a good start to the final quarter of 2023 and thus no immediate risk of a sharp downturn that would require a rate cut.
“Right now, we are still assessing whether interest rates are high enough,” he said. “They may be high enough; they may be restrictive enough to get us back .… you don’t want to be half-hearted in your efforts to get inflation back to target.”
Looking ahead, he said, “We don’t need to wait until inflation is back to 2% before we start lowering interest rates.”
“When we are confident that inflation is clearly on a path back to 2%, it will be a time to start that discussion about whether to cut interest rates,” he added.
“We suspect that much like (Federal Reserve Chair Jerome) Powell, the Bank will continue to sing from the hawkish song sheet, still openly talking about the possibility of rate hikes, not cuts,” he said in a report on Friday. “As we have often opined, the central banks are likely to err on the side of staying too tight for too long, rather than easing up on the inflation fight too soon.”
RBC economists also wrote in a report on the latest jobs data that the BOC will be “cautious about pivoting to rate cuts too quickly” and that it is expected to start to push the overnight rate lower in the second half of 2024.
Andrew Grantham, senior economist at CIBC, wrote in a report on Friday that the current trend of rising employment is expected to continue into the first half of 2024 and that the unemployment rate will likely peak between 6.0% to 6.5%, up from 5.8% now. “At that time, the labour market should be loose enough and inflation low enough to allow the Bank of Canada to start cutting interest rates in the second quarter of next year, which should help stabilize the labour market in the second half of the year,” he said.