Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The Bank of Canada cut its policy rate by 50bp to 3.25% and will continue quantitative tightening (QT), which is in line with our expectations.
The key message in today’s decision remains that the BoC still see further rate cuts but that the decision to cut will be taken one meeting at a time. With the policy rate at the upper end of its estimate of the neutral rate, the central bank is also very careful not to pre-commit to a rate path and make its next moves dependent on incoming information and its impact on the inflation outlook.
Overall, the BoC continues to signal that the policy rate will likely continue to decline the coming months. However, the likelihood of another 50bp is now very low. We continue to expect that the BoC will remain on an easing path and we expect the central bank to cut again at the Janaury meeting. (see Faster cuts do not mean deeper cuts).
However, with the policy rate close to neutral, the focus should turn to the terminal rate in the easing cycle. With the sharp deceleration in population growth next year and its impact on growth, we believe that the terminal rate may be close to 2.0% still higher than than pre-pandemic.
As we expected, the BoC cuts its policy rate by 50bp to 3.25%. It also said that it will continue its balance normalization or quantitative tightening policy. The BoC adds, “Governing Council has reduced the policy rate substantially since June. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time. Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.” On balance, this signals that, with the policy rate closer to neutral, the Bank of Canada still sees the direction of its policy rate as lower but that the pace of the reductions will depend on incoming data.
The BoC sees the global economy “evolving largely as expected in the Bank’s October Monetary Policy Report (MPR).” The Bank notes that the US economy “continues to show broad-based strength” and that inflation has been slightly persistent. While Europe remains weak, the central bank notes that policy actions in China and stronger exports are supporting growth, while consumer sending remains subdued. The BoC notes, “Global financial conditions have eased, and the Canadian dollar has depreciated in the face of broad-based strength in the US dollar.”
The BoC notes that the Canadian economy grew “somewhat below the Bank’s October projection, and the fourth quarter also looks weaker than projected”. The central banks notes that business investment, inventories and exports held back growth, while “consumer spending and housing activity both picked up, suggesting lower interest rates are beginning to boost household spending”. The Bank notes that the labour market remain soft and that rise in the unemployment rate is mainly due to job creation being weaker than the increase in the labour force. Regarding the temporary GST suspension, the BoC also mention that it “will look through effects that are temporary and focus on underlying trends to guide its policy decisions”.
The BoC expects inflation to remain close to the 2% over the coming years. The BoC also notes that “the upward pressure on inflation from shelter and the downward pressure from goods prices have both moderated as expected” and the the temporary cut in the GST will only have transitory impact on inflation.
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Independent Opinion
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