–Governing Council Focus Remains on Inflation Expectations, Wage Growth, Corporate Pricing
–Governor Macklem Wants to See Clear Downward Momentum in Underlying Inflation
By Max Sato
(MaceNews) – The Bank of Canada is widely expected to maintain its policy interest rate — the target for overnight lending rates — at 5.0% on Wednesday for a fifth straight meeting as bank officials continue monitoring both easing but lingering price pressures and slowing but resilient economic activity to avoid over-tightening and a premature rate cut at the same time.
Canada’s consumer inflation cooled more than expected to a seven-month low of 2.9% in January after ticking up to 3.4% in December from 3.1% in November but it is still above the bank’s 2% target. Fourth quarter GDP data showed the economy grew at a 1.0% annual rate after a 0.5% drop in the previous quarter, averting a recession and thus requiring an early shift toward credit easing.
“Those reports aren’t enough to move the needle for the BoC, which has preached patience as policymakers wait for inflation to move closer to the 2% target before considering easing,” BMO Capital Markets Canadian rates and macro strategist Benjamin Reitzes wrote in a report.
In its last policy decision on Jan. 24, the bank softened its hawkish tone amid sluggish economic growth but continued to warn that underlying inflation is persistent and wage growth is high. BoC policymakers are expected to communicate their intentions carefully so as not to dampen business and consumer confidence while keeping speculation for an early rate cut at bay.
The bank is expected to make little change to its previous statement: “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.”
“The tone of the statement is expected to be a tad more dovish as the Bank acknowledges the better inflation figures,” Reitzes said. “Nonetheless, don’t expect a clear indication that rate cuts are at all imminent. One good inflation print is not enough, and even a rate trim in April is a long shot, as we’ll only get one more inflation report before that decision.”
Economists expect the bank will wait until mid-2024 before considering lowering interest rates. Expectations for an early rate cut in both the U.S. and Canada have receded in the face of resilient labor markets and sticky services costs. After this week, the BoC will next announce its policy decision on April 10, when the bank also provides its medium-term economic forecasts and risk analysis in the quarterly Monetary Policy Report.
“A June start to cuts remains our base case, though that hinges on continued disinflation,” BMO’s Reitzes said.
The fact that the economy has eked out modest, but still positive gains, means that a soft landing is still the base-case scenario, TD Economics senior economist James Orlando wrote in a report. “This allows the BoC to sit back over the next couple of months and ensure that inflation continues to grind lower. We think it will, which will allow the BoC to make its first rate cut in June.”
Governor Tiff Macklem said in a speech last month that the bank’s decision to hold rates in January reflected Governing Council’s view that more time is needed to let monetary policy do its work to relieve underlying price pressures. He has said that underlying inflation 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.
“With continued evidence that monetary policy is working, 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,” the governor said. “We want to see inflationary pressures continue to ease and clear downward momentum in underlying inflation.
The CPI annual rate of 2.9% in January is the lowest since 2.8% in June 2023, which was the slowest growth since 2.2% in March 2021 and a sharp drop from a recent peak of 8.1% hit in June 2022.
But as wars in Europe and the Middle East and attacks on ships in the Red Sea have caused higher volatility in global oil and transportation costs, Macklem has warned that “the path back to 2% inflation is likely to be slow and risks remain.”
The bank’s latest projection is that domestic inflation will stay close to 3% through the first half of this year before declining to around 2.5% by year-end, and to the 2% target in 2025.
The BoC’s core inflation measures remain elevated after it moderated in the latest data. The year-over-year increase in the CPI trim eased to 3.4% in January from 3.7%. The annual rate of the CPI median slowed to 3.3% from 3.5%. Those measures strip out whatever is volatile at the time.
The labor market remains buoyant. Employment beat forecasts to rise 37,300 in January, unexpectedly lowering the jobless rate to 5.7% from 5.8% in December, which was the first decline since December 2022. Average hourly wages rose 5.3% on year in January, slowing slightly from a 5.4% rise in December, when it accelerated from 4.8% in November.
The Canadian economy grew 0.2% on quarter, or an annualized 1.0%, in the October-December quarter, after contracting an upwardly revised 0.1%, or an annualized 0.5% in July September. In the fourth quarter, higher exports and reduced imports fueled GDP growth, but this was moderated by a decline in business investment. In the latest monthly GDP data, the economy was flat in December after growing 0.2% in November, coming in weaker than Statistics Canada’s advance estimate of a 0.3% increase. The flash estimate for January is a 0.4% jump, possibly aided by mild weather.
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%.