Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud. 

Bottom line

The Bank of Canada kept its policy rate to 5.00% and will continue quantitative tightening (QT), in line with our expectations.

The key message in today’s decision is that the BoC sees clear signs that higher interest rates are moderating spending and reducing price pressures. However, the progress toward bringing inflation to target remains slower than the BoC would want to see and core inflation seems to be proving stickier than expected. As such, the BoC continues to point to solid wage growth, inflation expectations, corporate pricing behaviours and elevated momentum in measures of core inflation as reasons that could lead to an increase in the policy rate, if necessary.

Overall, in our view, the tone of the Communiqué suggests that the BoC believes it is done tightening monetary policy but is not yet ready to declare victory in its fight against inflation. The focus is now on how long interest rates will need to remain elevated to achieve its objective.

We believe that the BoC will likely stay on the until late spring to mid-year, when it opportunity for a cut will present itself. We believe that the BoC is unlikely to consider lowering its policy rate until the inflation is viewed as sustainably below 3%. This likely mean that its preferred core inflation measures and their momentums are around or below 2.5%, something we do not expect until May 2024. However, a much weaker economy 2024 is a risk that could force the BoC to move sooner. As we wrote previously (see Will it be a hard landing or a soft landing? The labour market will decide), whether we see an underperformance in hiring or job losses will determine whether we have a hard or soft landing in 2024.

The BoC leaves its policy rate at 5.00%, as expected. It also continued its quantitative tightening policy. In its statement, the BoC says that, while inflationary pressures have eased it remains “concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation”. However, the central bank did not make any mention that further hike may be required to achieve its goal.  Moreover, the BoC “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 BoC also makes it clear that it “remains resolute in its commitment to restoring price stability for Canadians,” suggesting that it stands ready to act if inflationary pressures do not ease and remain stubbornly sticky.

The BoC sees the global economy has slowed further and inflation easing. However, growth in the US have been much stronger than expected, but should slow as consumer spending and business investment weakend. The central bank also points that energy prices are much lower than expected in the October MPR, which could help with the inflation outlook. Moreover, the BoC also notes that the easing in financial conditions and that financial conditions have eased since the Fall.

In the Canadian economy, “economic growth stalled through the middle quarters of 2023”. As such, the Boc notes that “consumers have pulled back their spending in response to higher prices and interest rates”. Moreover, the Bank point to growing slack, with the economy “operating in modest excess supply.” While Kathleen market conditions have eased, the Bank notes that “wages are still rising around 4% to 5%.”

The BoC growth forecast is little changed in the January MPR compares to October with GDP growth expected at .8% in 2024 and 2.4% in 2025.

The BoC notes that inflation is expected to remain close to 3% for most of the first half of the year. The Bank highlights that “while the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines”. This suggests some frustration with the persistence in core inflation.

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Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.