–Governing Council Monitoring Inflation Expectations, Wage Growth, Corporate Pricing
–Governor Macklem Wants to See Clear Downward Momentum in Underlying Inflation
By Max Sato
In the coming months, BoC policymakers will have to make a tough decision as to when they should start lowering the rate from the restrictive level amid mixed economic indicators. Governor Tiff Macklem told reporters last month that “the path back to our 2% target will be slow, and progress is likely to be uneven” due to volatility caused by gasoline prices and lingering upward pressures from shelter costs.
The jobless rate jumped to 6.1 percent in March from 5.8 percent in February but growth in average hourly wages edged up to 5.1 percent on year after easing to 5.0 percent. Consumer inflation has moderated to a nine-month low of 2.8 percent in February from 4.0% last August while GDP showed the economy started the year with a robust 0.6 percent gain on the month in January and a further 0.4 percent rise is expected, setting the stage for over 3% annualized expansion in the first quarter, well above the BoC’s projection of just 0.5%.
Economists expect the bank will move in June to lower the policy rate by 25 basis points after the bank provides its latest medium-term economic forecasts and risk analysis in the quarterly Monetary Policy Report on April 10. In its January report, the bank projected that inflation would remain close to 3% during the first half of this year before gradually easing to the 2% target in 2025. Its GDP forecast for 2024 is expected to be revised up from modest 0.8% growth.
In Canada’s March jobs data, BMO Financial Group chief economist Douglas Porter noted, the key points are a full percentage point rise in the unemployment rate over the past year to 6.1% and the stickiness of wages at 5.1% in the face of that softness. “That combination leaves the Bank of Canada in a tricky spot, with the job market clearly softening, yet still spinning off strong income gains,” he wrote in a report.
“On balance, the BoC will likely view the overall results as pointing to more disinflationary pressure ahead, and will await the next couple of inflation prints, but a June cut is looking a bit more likely now,” Porter predicted. “So, even with an upgrade to GDP, the door is open wide for the bank to sound more dovish at next week’s policy meeting.
In its March 6 policy statement, the bank repeated said that Governing Council was “still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation.” It also maintained is recent view: “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.”
Last month, Governor Macklem told reporters that while shelter price inflation is the biggest contributor to inflation right now and thus weighing on the bank’s policy decision, “If you look beyond shelter, we are seeing underlying inflation pressures persist.” CPI shelter items include rent, mortgage interest cost, maintenance and repairs and utilities.
The core CPI measures that strip out most of the shelter components are still running above 3%, whether on a 12- or three-month basis, Macklem said. Since his remarks, the year-over-year increase in the CPI trim eased further to 3.2% in February from 3.4% in January while the annual rate of the CPI median slowed to 3.1% from 3.3%.
James Orlando, senior economist at TD Economics, also said recent Canadian data outside of the employment report has been strong and validated the bank’s decision to remain patient with the start of rate cuts.
“While it has afforded the central bank some extra time to wait to ensure inflation remains on its downward trajectory 2%, markets are increasingly betting that the BoC will pull the trigger on its first rate cut in June,” he said.
The BoC raised its target for overnight lending rates by a total of 475 basis points (4.75 percentage 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%.
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