Bank of Canada cautions markets against rate-cut bets
With markets pricing in rate cuts by the end of the year, the Bank of Canada today made clear that it doesn’t share the same outlook.
Bank of Canada Governor Tiff Macklem addressed the rate-cut forecasts in a press conference following the Bank’s rate announcement, in which it left the benchmark rate unchanged at 4.50%.
“…based on the information we have today, the implied expectation in the market that we’re going to be cutting our policy rate later in the year, that doesn’t look today like the most likely scenario to us,” he said.
Despite the Bank forecasting that inflation should reach its target rate of around 2% by next year, observers noted the hawkish bias in the Bank’s statement, in which it reiterated that rate hikes are still on the table if current economic forecasts don’t play out.
“Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target,” its statement read.
The Bank added that Quantitative Tightening, the current process of normalizing the Bank’s balance sheet, including selling bonds, is continuing to complement its “restrictive” monetary policy stance.
The BoC is “clearly wanting to see more evidence of easing wage growth, slowing services inflation and normalization in inflation expectations to be confident that inflation will return to target on a sustained basis,” noted RBC Economics economist Josh Nye.
“Banking turmoil has erased market odds of the BoC restarting its tightening cycle, but today’s statement seems to be a reminder that the bank has a tightening, not an easing bias, and investors might be underestimating the potential for further rate hikes,” he added.
Updated forecasts in the latest Monetary Policy Report
The Bank released its latest economic forecasts in its April MPR. Here are some of the highlights:
The Bank sees headline inflation slowing to around 3% by mid-2023 before reaching its 2% target in 2024. But the Bank added that getting down to 2% “could prove to be more difficult” due to elevated inflation expectations, high wage growth and services inflation.
3.6% in 2023 (vs. 4.1% in its previous forecast)
2.3% in 2024 (vs. 2.2%)
The Bank now expects annual economic growth of:
1.4% in 2023 (from a previous forecast of 1%)
1.3% in 2024 (from 1.8%)
The BoC noted that there remains ongoing excess demand in Canada, and, even though first-quarter GDP growth came in above its forecast, the Bank still expects growth to be “weak through the remainder of this year.”
BoC keeps neutral rate estimate status quo
In its April MPR, the BoC announced no change to its 2% to 3% neutral range estimate from its April 2022 report but 0.25% below its pre-pandemic estimate.
Some economists had been expecting the BoC to revise this estimate higher given the historic run-up in rates and inflation.
The Bank explained that the midpoint estimate consists of a 2% inflation target and a 0.5% real neutral rate.
“Because Canada is a small open economy, its real neutral rate of interest is influenced by global economic conditions,” the MPR explained. “The Bank uses an estimate of the real neutral rate for the United States as a proxy for these. The US real neutral rate is estimated at 0.5%. The estimate is largely determined by the Bank’s view on US potential output growth and other factors that govern the US savings and investment balance.”
The impact of higher interest rates on mortgage borrowers
The latest MPR also examined the impact higher interest rates are having on mortgage borrowers. More on that here.
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