The Bank of Canada left monetary policy unchanged at today’s meeting. The target for the overnight interest rate remains 5% and the Bank continues with quantitative adjustment.
The market has latched on to the slightly dovish change in the BoC’s stance with Governor Macklem stating that “there was a clear consensus to keep our policy at 5%“with the deliberations”moving from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance”. In this sense, the Bank has taken the important step of eliminating the line that the Bank “remains ready to increase the official interest rate further if necessary” from the attached statement.
However, the Bank remains concerned about the inflationary context. It does not expect the annual CPI to return to the 2% target until 2025 given “Basic inflation measures do not show sustained declines.”, not helped by the increase in salaries between 4% and 5%. That said, there was recognition that the economy “has stagnatedThe economy is likely to stagnate in the first quarter of 2024. The BoC remains hopeful that it will recover from mid-2024, but the BoC’s latest business outlook survey reported weakening demand and “less favorable trading conditions” in the fourth quarter with high interest rates having “negatively impacted most companies“, leading to “most companies“He doesn’t plan to do it”add new staff”.
Job growth appears to be cooling and let’s also remember that Canadian mortgage rates will continue to rise for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. In our view, this will intensify financial pressure on households, curbing both consumer spending and inflationary pressures. Unemployment is also expected to rise given the slowdown in job creation and high rates of immigration and population growth.
In this context, we expect Canadian headline inflation to slow to 2.7% in the first quarter and drop to 2% in the second quarter, well ahead of what the BoC expects. Consequently, we see scope for the BoC to cut rates by 25 basis points at each meeting starting in April (the market is pricing this as a 50:50 option at the moment). This means 150 basis points of interest rate cuts versus the consensus and market price prediction of 100 basis points of policy easing.