Bank of Canada sends dovish signals, keeping mid-year rate cut forecasts in play
As was widely anticipated by markets, the Bank of Canada today held its overnight target rate at 5.00%, where it’s been since July.
Aside from the expected rate hold, markets focused on several “dovish” signals from the central bank, including the absence in today’s statement of its previously used line that it “remains prepared to raise the policy rate further if needed.”
And during a press conference following the announcement, BoC Governor Tiff Macklem confirmed that “there was a clear consensus to maintain our policy at 5%,” and that the deliberations shifted from “whether monetary policy is restrictive enough to how long to maintain the current restrictive stance.”
“While the Bank isn’t yet ready to signal a change in policy, markets are taking the lead,” wrote economist James Orlando of TD Economics. “Odds are pointing to the first rate cut happening in April/June. We echo this sentiment.”
He points to a “flatlining” of the economy since the summer and a return of the job market back to balance. “Even the BoC’s quantitative tightening policy looks to have potentially gone too far with market overnight rates continuing to drift from the Bank’s target rate,” he added.
Bond markets continue to price in 33% odds of a quarter-point rate cut as early as March, and 55% odds of a 50-bps rate cut by June.
The BoC still remains concerned about inflation expectations
However, the Bank made clear that it remains concerned about the inflation outlook and the “persistence of underlying inflation.”
“Governing Council wants to see further and sustained easing in core inflation,” it said. In its latest inflation outlook, the Bank maintains that headline inflation won’t return to its desired 2% target until 2025.
It said that due to strong wage growth of 4% to 5%, “core measures of inflation are not showing sustained declines.”
Bank of Canada acknowledges problematic shelter costs
For the first time, the Bank also referenced the impact of high shelter costs, which it noted are the biggest contributors to above-target inflation.
“The Bank of Canada…is starting to shift its tone in stronger acknowledgement of the problematic forces of shelter costs,” Orlando said.
Despite consumers cutting back on spending over the past year, which would typically lead to a more rapid deceleration in inflation, Orlando noted that “structural imbalances in the real estate sector are keeping the BoC’s preferred inflation gauges elevated.”
“Importantly, this factor was a big focus of today’s policy statement,” he said.
In its latest Monetary Policy Report (MPR), the Bank pointed to several factors contributing to shelter costs remaining elevated compared to other Consumer Price Index basket items that have since eased.
“Mortgage interest costs are boosting inflation to a greater extent than in previous episodes of monetary policy tightening,” it noted. “This reflects the combined effect of a long period of historically low interest rates and a very rapid increase in policy rates through 2022 and 2023.”
It also pointed to strong population growth as putting continued pressure on the “structural supply constraint” in housing.
BoC lowers GDP growth forecasts further
In its latest MPR, the Bank unveiled some updates to its economic projections.
The Bank revised down its GDP growth forecasts slightly, including it’s full-year average for 2023 of 1%, down from 1.2% previously.
The Bank now expects annual economic growth of:
0.8% in 2024 (vs. 0.9%)
2.4% in 2025 (vs. 2.5%)
Meanwhile, the Bank’s inflation forecasts remained largely unchanged.
3.9% in 2023 (unchanged from its October MPR)
2.8% in 2024 (vs. 3.0%)
2.2% in 2025 (unchanged)
The Bank of Canada’s next rate decision is scheduled for March 6, 2024.
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