By Max Sato
(MaceNews) – The Bank of Canada is expected to maintain its policy interest rate – the target for overnight lending rates – at 4.50 percent on Wednesday in what its policymakers call a “conditional” pause during the current tightening cycle that began in March last year.
The labor market remains tight and economic growth in the first quarter is forecast to post a sharp rebound after being flat at the end of 2022 amid rising borrowing costs and cooling global demand. Canada’s policy to boost immigration is likely to provide more labor supply, although a higher working population means consumer spending will also rise.
The International Monetary Fund forecast that global economic growth will decelerate from 3.4% in 2022 to 2.8% in 2023 while advanced economies will see a more pronounced slowdown from 2.7% in 2022 to 1.3% in 2023. “In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5% in 2023 with advanced economy growth falling below 1%,” the IMF said.
BOC officials have said it is too early to discuss normalizing the bank’s high policy interest rate because consumer inflation at 5.2 percent remains well above its 2 percent target, although it has eased from its recent peak of 8.1 percent hit last June.
“We look for the bank to hold at 4.5% both in April, and for the remainder of 2023,” Douglas Porter, chief economist at BMO Financial Group, said in a report.
The Bank of Canada is the first among major central banks to pause after their aggressive credit tightening last year (except for the Bank of Japan, which has been tweaking its large-scale monetary easing tools to make them more sustainable toward stable 2% inflation with substantial wage hikes).
The global banking sector strains are expected to support the bank’s pausing mode, Porter said, adding, “And a pair of much milder than expected CPI releases to start the year have reinforced the conviction that the bank is done tightening for the cycle.”
But the bank’s policymakers are closely monitoring the strength in the domestic economy.
Employment in Canada has been on a general uptrend since September 2022, growing by 35,000 in March, well above expectations, and following little change in February and strong growth in January (+150,000) and December (+69,000). The unemployment rate held steady at 5.0% for the fourth consecutive month in March, just above the record low of 4.9% recorded in June and July of 2022. Average hourly wages rose 5.3% (+C$1.68) to reach C$33.12 in March, which is likely to be well above total inflation for the month.
“The rollicking job gains suggest that our upsized estimate for Q1 GDP of 2.5% may still be on the light side of reality,” Porter said. He also pointed to recent signs that the housing sector in Canada may be stirring after the past year’s pounding. “Sales and prices look to have nudged up from weak levels in some of the major cities in March, or exactly when the bank moved to the sidelines,” he said.
In its quarterly Monetary Policy Report released in January, the bank forecast that Canada’s GDP growth will slow to an annualized pace of 0.5% in the January-March quarter after growing an estimated 1.3% in October-December. The bank will update its growth and inflation forecasts as well as risk analysis in the April report due at 1000 EDT (1400 GMT) on Wednesday, when it release its interest rate announcement.
The latest data showed that the Canadian economy showed no growth in the final quarter of 2022 as a slower inventory buildup and declines in business investment and housing offset higher household and government spending and improved net trade. But the GDP rebounded a sharp 0.5% on the month in January, thanks to mild weather and solid consumption on services, following a slight 0.1% contraction in December, and Statistic Canada’s advance estimate showed GDP gained 0.3% in February.
Resilient consumer spending and persistent wage growth are not necessarily good news for central banks that are still trying to cool off economic activity and bring inflation down to target, Avery Shenfeld, chief economist at CIBC Capital Markets, wrote in a report.
“The Bank of Canada won’t be completely willing to dismiss the ‘bad’ news about better growth to start this year, and will therefore be far from joining the market’s thinking about rate cuts coming soon,” he said. “For that, we’ll really need to see some genuinely bad news, in the form of higher unemployment and a drop in output for a quarter or two.”
In its last policy announcement on March 8, the bank’s Governing Council said it decided to leave its policy interest rate unchanged, widely expected, but stressed that it is not lowering its guard against upside risks to inflationary pressures as labor market conditions remain “very tight” and consumer spending is resilient.
The bank raised the policy rate for the eighth consecutive time in January with a 25-basis-point hike aimed at bringing high inflation back to its 2% target. The pace was slower than 50 bps in December and October, 75 bps in September and 100 bps in July.
Governor Tiff Macklem has repeatedly said that it is a “conditional pause” and that the bank will be prepared to raise rates further if it believes it is necessary to do so to get inflation back to target.
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Contact this reporter: max@macenews.com
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