In line with market expectations, the Bank of Canada today kept its target interest rate unchanged at 5 percent, the second straight meeting with no adjustment in policy. However, as was the case at the previous announcement on September 6, the tone of the press release strongly suggested that the Bank may yet find it necessary to resume tightening, given the persistence of inflationary risks.
The media release is slightly longer than usual and largely reflects the analysis and forecasts provided in the quarterly Monetary Policy Report, also released today. Some key points, with commentary:
The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand...... the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected. The shift in the composition of growth could prove significant for the Bank going forward. Given that the US accounts for more than 70 percent of Canada's external trade, a stronger US economy in and of itself adds at the margin to inflation risk in Canada.
In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures..... In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance. The tightness in the labour market is evidently contributing to wage pressures. something the Bank is especially anxious about. There is currently a strike on the economically vital St Lawrence Seaway that has seen the employers complain that the workers are looking for the same kind of wage increases that have recently been won by Canadian auto workers. The Bank will be very watchful for such signs of a wage-price spiral, something that has been avoided so far.
After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand......Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025. This would certainly represent the softest of soft landings. New monthly GDP data for August, due for release on October 31, are likely to suggest that the economy, having shrunk marginally in Q2, narrowly avoided a technical recession in Q3.
Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services. Food inflation is easing from very high rates.....Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.....CPI inflation is expected to average about 3½% through the middle of next year before gradually easing to 2% in 2025.....the near-term path is higher because of energy prices and ongoing persistence in core inflation. Recent volatility in monthly CPI data has evidently reinforced the Bank's view that progress back toward the 2 percent target will be slow from this point onwards. The forecast combination of negligible growth and sticky inflation over the next twelve months is a particularly tricky scenario for policymakers.
The press release concludes with a clear warning:Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed. Despite this, commentary from Bay Street analysts suggests that most believe the tightening cycle is over, which is probably not something the Bank will be happy to see. The Bank's Governing Council may privately think that they are done with tightening, but they surely don't want markets of the public feeling too confident about that just yet.
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