Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
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 slow. 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.
We believe that the BoC will likely stay on the sideline for the foreseeable future. The focus now turns to the timing of a potential rate cut. We believe that the BoC is unlikely to consider lowering its policy rate until the inflation is viewed as sustainably below 3%. This could require the measure of momentum in its preferred core inflation measure to be around or below 2.5%, something we expect in the Spring of 2024. However, the focus remains on how much weaker the economy will be in 2024 and, 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.
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 there are “further signs that monetary policy is moderating spending and relieving price pressures”. However, the central bank remains “concerned about risks to the outlook for inflation” and left the door open to further rate hikes, if necessary. 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 decisively if inflationary pressures do not ease and remain stubbornly sticky.
The BoC sees the global economy as slowing further and inflation easing. However, growth in the US have been much stronger than expected, supported by consumer spending. 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, as longer interest rates declined after a sharp increase over the summer.
In the Canadian economy, “economic growth stalled through the middle quarters of 2023”. As such, the Boc notes that “higher interest rates are clearly restraining spending”. Moreover, the Bank point to continued easing in the labour market: “job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly”. The central also took note of wage growth that remains elevated. Overall, the BoC views that the “economy is no longer in excess demand”.
The BoC notes that inflation have moderated for a broad range of goods and services. The Bank highlights that lower gasoline prices have been an important contributor to slower inflation, but notes that shelter prices have accelerated. The central bank also notes that core inflation remains elevated, saying that “the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range”.
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