Bank of Canada softens its tone

In line with market expectations, the Bank of Canada today kept its overnight rate target unchanged at 5 percent while maintaining its policy of quantitative tightening. The tone of the accompanying media release is noticeably less hawkish than in the recent past, reinforcing the growing perception that the tightening cycle is at an end.  However, there are no clear indications as to when the Bank may start cutting rates. A few key quotes:

• The global economy continues to slow and inflation has eased further...... Financial conditions have also eased, with long-term interest rates unwinding some of the sharp increases seen earlier in the autumn. That easing of financial conditions is, of course, a reflection of markets' perception that the tightening cycle is over, not just in Canada but in most major financial markets. 
• In Canada.....real GDP contracted at a rate of 1.1% in the third quarter, following growth of 1.4% in the second quarter. Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year......The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand. The comment about job creation being slower than labour force growth might be seen as slightly disingenuous: given the extraordinary rise in the labour force, it would be amazing if that were not so. Still, the overall tone of this analysis shows that the Bank is firmly convinced it is on the right track, tempered only by a slight degree of concern over wage growth. 
• The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices. Combined with the drop in gasoline prices, this contributed to the easing of CPI inflation to 3.1% in October. However, shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs. In truth, most of the recent decline in headline CPI has been gasoline-related, but the Bank is clearly seeing signs of improvement elsewhere. "Elevated" mortgage interest costs may soon begin to fall in response to the easing financial conditions noted earlier, and that process will of course accelerate as and when official interest rates start to decline. 

And in conclusion: Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council 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 Bank remains resolute in its commitment to restoring price stability for Canadians.  This is little changed from the Bank's recent rhetoric.  Markets have been getting a little ahead of themselves in predicting the timing and extent of rate cuts, with one major bank predicting cuts of 150 basis points during 2024. The Bank of Canada likely does not see such speculation as productive, not least because of its potential effect on house prices. It is most unlikely that rates will come down as quickly as they went up.