On hold, but not happy about it

Mainly in response to last week's report of a decline in GDP during the second quarter of the year, markets had scaled back almost to zero their expectations for a further rate hike at today's Bank of Canada Governing Council meeting.  The Bank did indeed keep its overnight rate target unchanged at 5 percent, but the assertive tone of most of the press release gives the strong impression that but for that GDP report, today would have brought another rate hike. Consider these quotes: 

"....with measures of core inflation still elevated, major central banks remain focused on restoring price stability".

"Recent CPI data indicate that inflationary pressures remain broad-based..... CPI inflation is expected to be higher in the near term before easing again. Year-over-year and three-month measures of core inflation are now both running at about 3.5%, indicating there has been little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability"

Neither of those statements sounds like a central bank that thinks its work is done, but the latest developments in the real economy clearly made it impossible for the Bank to justify another rate hike at this time:

"The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures..... Economic growth slowed sharply in the second quarter of 2023, with output contracting by 0.2% at an annualized rate.......Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%".

Is there perhaps a hint of a suggestion there that the Bank wishes the Federal Government was not making its job harder by continuing to boost public spending?  Sure sounds like it, though the Bank is always careful not to make political statements, at least in public. Politicians, alas, feel no such constraint: the Premiers of both British Columbia and Ontario penned very public letters to Governor Tiff Macklem in recent days, urging the Bank not to hike rates further. And in the wake of the Bank's announcement, Federal Finance Minister Chrystia Freeland has issued a statement welcoming the news. These are not welcome developments and it's to be hoped they do not set some kind of precedent. 

The final paragraph of the press release deserves to be quoted in full:

"With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5% and continue to normalize the Bank’s balance sheet. However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians". 

Not to over-analyze that, but the fact that the "evidence" in the first sentence is described as "recent" rather than as, say, "growing" seems to underscore the importance of the GDP data in the Bank's decision today. The rest of the paragraph is just about as hawkish as anything the Bank has said over the past year and more; given that the Bank's definition of price stability continues to be the 2 percent target, it is clear that further rate hikes cannot be ruled out. Before the next rate setting date of October 25, we will see two more monthly sets of both employment and CPI data, as well as GDP data for August. It will take clear signs of weakness across that data set to take another rate hike off the table.