Today, the Bank of Canada held its policy interest rate steady for the first time in a year based on its assessment of recent inflation and economic data. As a result, the benchmark interest rate remains at 4.50%.
This is certainly welcome news for borrowers who have endured eight rate increases that took the overnight rate up from just 0.25% at the beginning of 2022.
Now all eyes are on what happens next with monetary policy. For clues, we summarize the Bank’s observations below.
Canadian Inflation
- Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services
- Price increases for food and shelter remain high, causing continued hardship for Canadians
- With weak economic growth expected for the next couple of quarters, pressures in product and labour markets are expected to ease, which should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers
Canadian Economic Performance
- Canadian economic growth came in flat in the fourth quarter of 2022, lower than the Bank projected
- With consumption, government spending and net exports all increasing, weaker-than-expected GDP was largely because of a “sizeable slowdown” in inventory investment
- Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand
- The labour market remains very tight and employment growth has been “surprisingly strong”
- The unemployment rate remains near historic lows, and job vacancies are elevated
- Wages continue to grow at 4% to 5%, while productivity has declined in recent quarters
Global Economic Performance and Outlook
- Global economic developments have evolved broadly in line with the Bank’s January Monetary Policy Report outlook
- Global growth continues to slow, and inflation, while still too high, is coming down due primarily to lower energy prices
- In the United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January
- Labour markets remain “tight”, and elevated core inflation is persisting
- Growth in China is rebounding in the first quarter
- Commodity prices have evolved “roughly in line with the Bank’s expectations,” but the strength of China’s recovery and the impact of Russia’s war in Ukraine remain key sources of upside risk
- Financial conditions have tightened since January, and the US dollar has strengthened
Outlook
The Bank observed that year-over-year measures of core inflation “ticked down” to about 5%, and 3-month measures are around 3.5%. In the Bank’s view, both will need to “come down further,” as will short-term inflation expectations, to return inflation in Canada to the Bank’s 2% target.
That said, the Bank now expects CPI inflation will reduce to “around 3%” in the middle of 2023.
In its last policy statement – January 2023 – the Bank’s Governing Council indicated that it expected to hold the policy interest rate at its current level, “conditional on economic developments evolving broadly in line with the MPR outlook.” It repeated this statement today as it announced its decision to maintain the policy rate of 4.5%.
It also indicated it is continuing its policy of quantitative tightening as a complement to its “restrictive stance” on interest rates. It went on to announce that it will continue to assess economic developments and the impact of past interest rate increases, and “is prepared to increase the policy (interest) rate further if needed to return inflation to the 2% target.” This is part of what the Bank calls its “resolute” commitment to restore price stability for Canadians but also perpetuates some market uncertainty.
The next report on CPI in Canada will be made public on March 21, 2023 covering February data.
Next Touchpoint
April 12, 2023 is the Bank’s next scheduled policy interest rate announcement. First National will be on hand to provide an executive summary the same day. For other capital market insights in between, please visit the Resources page of our website on a regular basis.