The Bank of Canada maintained the overnight rate at 5.0%, while stating that it will continue with Quantitative Tightening (QT).
The Bank highlighted the slowing in economic momentum, stating that growth “remained weak and below potential”, while emphasizing that “final domestic demand contracted with a large decline in business investment”. It also stated that “employment continues to grow more slowly than the population, and there are now some signs that wage pressures may be easing”.
On the inflation outlook, the BoC mentioned that inflationary pressures have eased. But in spite of shelter being the driver of overall inflation, it has focused on the fact that “the share of CPI components growing above 3% declined but is still above the historical average”. It expects that inflation will “remain close to 3% during the first half of this year”.
On the future path of policy, the Bank is still concerned about the “persistence in underlying inflation (and the) Governing Council wants to see further and sustained easing in core inflation.”
A press conference is forthcoming at 10:30.
Key Implications
The song remains the same. The BoC came out today to reinforce its view that more time is needed to make sure that inflation is headed to the 2% target. We get it. With core rates of inflation tracking around the mid-3% level, the Bank can justify waiting longer. Luckily the central bank has been gifted a little more time to wait. Economic growth eked out small, but positive, growth to end 2023. With effectively no pressure for the BoC to respond, it can sit back and wait for a couple more inflation reports to roll in.
Markets don’t think the BoC can get too comfortable. A June cut is nearly 90% priced, and we agree with that timing. In spite of the economy having avoided recession, consumers are feeling the pain of higher rates. Spending per capita has contracted over the better part of the last 18 months. And it is not as if rate hikes aren’t impacting inflation. Sure, the BoC’s core measures are still elevated, but they are being driven by shelter prices. Indeed, inflation excluding shelter is running below the BoC’s 2% target, at only 1.6% year-on-year. While the BoC isn’t ready to adjust course just yet, we think that the time for rate cuts is quickly approaching.
