Erik Hertzberg and Randy Thanthong-Knight
The Bank of Canada held its policy rate steady for a fourth consecutive meeting and explicitly stated for the first time that it won’t need to increase it again if the economy evolves in line with its forecasts.
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Policymakers led by Governor Tiff Macklem left the benchmark overnight rate unchanged at 5% on Wednesday, a pause that was widely expected by markets and by economists in a Bloomberg survey. Officials say the data show economic growth has stalled and will remain slow in the near term, which will help bring inflation back to the bank’s 2% target next year.
“There was a clear consensus to maintain our policy rate at 5%,” Macklem said in opening remarks at a news conference.
“What came through in the deliberations is that governing council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance.”
“What came through in the deliberations is that governing council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance.”
The dovish communications suggest the bank sees a rapidly slowing economy and believes its past rate increases — 475 basis points in less than two years — are sufficient to quell inflation. That potentially opens the door to rate cuts in coming months.
“If the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at 5%,” Macklem said.
The Canadian dollar tumbled after the release, erasing earlier gains to trade at C$1.348 per US dollar at 10:23 a.m. New York time. The yield on the benchmark 2-year note was down about 3 basis points on the day to 4.013%.
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“The Bank of Canada isn’t ready, willing or able to bring interest rate relief just yet, but dangled some hints that lower rates are on the way later this year,” Avery Shenfeld, an economist with the Canadian Imperial Bank of Commerce, said in a report to investors.
Shenfeld said the governor’s remarks represent a “dovish tilt” but are still consistent with the CIBC’s call for a first rate cut in June and as many of 150 basis points of cuts this year.
The governor reiterated the need to balance the risks of over- and under-tightening, but also noted concerns about the persistence of underlying price pressures, warning that policymakers haven’t ruled out further rate increases if new developments push inflation higher. Still, the bank removed language from its previous policy statements that said it remained prepared to hike again.
That provides a clear signal that rate hikes are over, Benjamin Reitzes, a Canadian rates and macro strategist at Bank of Montreal, said by email. “I’m not sure anyone really took that threat as credible anyways,” he added.
Soft Landing
Officials want to see “further and sustained easing” in core inflation and will continue to focus on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing activity, the bank said in its statement.
Its forecasts suggest the economy is now in “modest excess supply” and it trimmed its economic growth projection to 0.8% this year, from 0.9%. Still, the Bank of Canada’s base case remains a soft landing, with growth picking up around the middle of the year.
Officials expect inflation to remain close to 3% over the first half of 2024 before declining to around 2.5% by the end of the year and returning to the bank’s 2% target next year.
The consumer price index accelerated to a 3.4% yearly pace in December, and has been stuck above the 3% cap of the central bank’s target operating band for 32 of the past 33 months. A closely watched measure of the Bank of Canada’s preferred core metrics also spiked.
“Over the projection horizon, ongoing excess supply in the economy continues to weigh on prices, and corporate pricing behavior and inflation expectations gradually return to normal,” the bank said in its monetary policy report.
Wage growth, which is still rising at a 4% to 5% yearly pace, is expected to slow, falling closer in line with inflation and modest productivity growth, the bank said.
Shelter price inflation, however, is expected to remain “elevated for some time,” with growth in mortgage interest costs seen slowing gradually as financial conditions ease and the impact of additional households renewing and taking on new mortgages decreases.
Rental price inflation, which is supported by strong demand for housing and tight supply, is forecast to moderate due to a slowdown in population growth and an expected increase in new housing construction.
A stronger-than-expected rise in house prices is one of the main risks that could drive inflation higher than expected, the bank said.
Canada’s economy is more rate-sensitive than its peers due to higher debt loads and shorter-duration mortgages. Most economists see the Bank of Canada cutting the policy rate by June, and traders in overnight swaps are placing similar bets.
“It’s a new year with the same challenges. One thing is clear though, interest rates and inflation will be coming down in 2024,” Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said by email. “Governing council isn’t ready to discuss timing around interest rate cuts and is using central bank-speak in lieu of policy action as we enter a third year of higher interest rates.”