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 is not yet ready to consider rate cuts. The Bank continues to be concerned by the persistence in underlying inflation. As we have pointed out on many occasions, the fact that inflationary pressures remain broad, with about 45% of the CPI components still increasing at more than 3%, and the momentum in the BoC still above 3% are the main concern and focus when it comes to inflation.
Overall, in our view, the tone of the Communiqué suggests that the BoC is not yet ready to declare victory in its fight against inflation and that it is too early to position itself for an imminent rate cut.
We believe the BoC will cut its policy rate at the June meeting. We believe that the BoC is unlikely to consider lowering its policy rate until the inflation is viewed as sustainably below 3%. This likely means that its preferred core inflation measures and their momentums are around or below 2.5%, which 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 will also continue its quantitative tightening policy. In its statement, the BoC says that “the Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation.” In addition, the statement makes it clear that the BoC is not yet ready to discuss cutting its policy rate. Before doing so, 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 in the fourth quarter. However, while growth in the US has slowed, it remained “surprisingly robust and broad-based,” while the Euro area was “flat at the end of the year after contracting in the third quarter.” The Bank notes that global inflation has continued to ease and that, while bond yields have increased since January, spreads have narrowed, suggesting little change in credit conditions.
In the Canadian economy, “the economy grew in the fourth quarter by more than expected”, but still weaker than potential. This suggests a further widening of the output gap. The BoC notes that “employment continues to grow more slowly than the population, and there are now some signs that wage pressures may be easing”. All this points to an economy that is operating with a “modest excess supply”.
The BoC notes that inflation is expected to remain close to 3% for most of the first half of the year, before easing gradually. The Bank highlights that “underlying inflationary pressures persist: year-over-year and three-month measures of core inflation are in the 3% to 3.5% range, and the share of CPI components growing above 3% declined but is still above the historical average”. The persistence in underlying inflation is most likely what is keeping the BoC from cutting its policy rate.
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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.