The Bank of Canada today kept its overnight rate target at 5 percent, in line with unanimous market expectations. The press release is mostly a listing of factors that are starting to line up for eventual policy easing, followed by a brief paragraph explaining why it's not yet time to make a move. The Bank has also published an updated Monetary Policy Report today, and Governor Macklem's introductory remarks give more insight into how the Governing Council is currently thinking.
Let's start with the press release. After an opening paragraph that simply states the Bank's decision, we get two paragraphs on the global growth picture. Key quotes: "While growth in the United States has been stronger than expected, it is anticipated to slow in 2024". This is of course key for the Canadian economy and for policymakers, given the overwhelming importance of the US to Canada's external trade sector. "The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025". It is, of course, important for the Bank not to get its policy cycle too far out of line with the rest of the world, so the expectation that other central banks will soon be in a position to cut certainly makes its job easier.
We then move on to two paragraphs on the domestic economy. Key quotes: "the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024....the economy now looks to be operating in modest excess supply.....However, wages are still rising around 4% to 5%". That final quote about wages is the first indication of the Bank's lingering concern that slower growth has not yet created conditions for lower interest rates. "Economic growth is expected to strengthen gradually around the middle of 2024.... Spending by governments contributes materially to growth through the year. Overall, the Bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection". Once again we see the Bank complaining, albeit gently, that relentlessly expansionary fiscal policy is not making its job any easier.
Finally we get a paragraph on inflation, explaining why it is still too soon to cut, even if the stars are coming into alignment. It's worth quoting the full paragraph:
"CPI inflation ended the year at 3.4%. Shelter costs remain the biggest contributor to above-target inflation. The Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines".
Shelter costs are at least partly under the Bank's direct influence because of the role played by mortgage costs, but it is arguable that rapid, immigration-driven population growth is a bigger factor. You might think that the statement that "core measures of inflation are not showing sustained declines" would lead the Bank to question whether the fall in headline CPI might not, in fact, have been brought about by Bank policy moves, and is instead mainly the result of supply chain normalization. Needless to say, that's not how the Bank sees it.
The final paragraph spells out what the Bank is looking for in the months ahead. "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".
It's hard to judge from that just how close the Bank is to starting an easing cycle, but Governor Macklem's opening remarks are rather more explicit:
"...monetary policy is working to relieve price pressures, and we need to stay the course. Inflation is coming down as higher interest rates restrain demand in the economy. But inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work.
...with overall demand in the economy no longer running ahead of supply, Governing Council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level".
Setting aside the Bank's apparent belief that it can claim all the credit for lower inflation, it's clear that these paragraphs continue the recent trend towards softer rhetoric about the rate outlook. Monthly GDP data for December, due for release a week from today (i.e. January 31) should give a clearer reading on whether the economy has already slipped into a mild technical recession. If it has (and the guess here is that it hasn't, but it might be very close), calls for early rate cuts are certain to intensify. The Bank is highly unlikely to respond, but the tone of today's releases suggests the easing cycle may start a bit earlier than previously seemed likely. Waiting until June still makes good sense, but April can no longer be ruled out.
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