| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 0bp | 0bp | 25bp |
| Level | 4.50% | 4.50% | 4.50% |
Highlights
The Bank of Canada on Wednesday left its policy interest rate -- the target for overnight lending rates -- at 4.50 percent, as widely expected, but stressed that it is not lowering its guard against upside risks to inflationary pressures as labor market conditions remain"very tight" and consumer spending is resilient.
While cumulative effects of monetary policy tightening are slowing growth in Canada and elsewhere and commodity prices have evolved roughly in line with the bank's expectations,"the strength of China's recovery and the impact of Russia's war in Ukraine remain key sources of upside risk," the bank said.
"Based on its assessment of recent data, Governing Council decided to maintain the policy rate at 4.50 percent. Quantitative tightening is complementing this restrictive stance," the bank said, indicating that its policy bias is still toward tightening.
"Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2 percent target," it concluded.
The message is largely the same as in January but the wording leaves the impression that the bank is leaving its options open. In the January statement, the bank said,"If economic developments evolve broadly in line with the MPR (Monetary Policy Report) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases. Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2 percent target."
At its previous policy announcement on Jan. 25 and ensuing official comments, the bank indicated that it was pausing in tightening on condition that growth and inflation move in line with its predictions. It raised the policy rate for the eighth consecutive time in January with a 25-basis-point hike in the tightening phase that began in March aimed at bringing high inflation back to its 2 percent target. The pace was slower than 50 points in December and October, 75 points in September and 100 points in July.
Governor Tiff Macklem has repeatedly said that it is a"conditional pause" and that the bank will be prepared to raise rates further if it believes it is necessary to do so to get inflation back to target.
The bank is scheduled to announce its next monetary policy decision on April 12 and release its latest economic projections in the quarterly Monetary Policy Report.
BoC Continues to Sees 3 percent Inflation in Mid-2023
The bank maintained its projection made in January that CPI inflation will slow to 3 percent in mid-2023. It didn't refer to its latest assessment that it should return to the 2 percent target in 2024 but the projection remains valid until it provides updates on its medium-term economic forecasts in the Monetary Policy Report in April.
"Overall, the latest data remains in line with the bank's expectation that CPI inflation will come down to around 3 percent in the middle of this year," the bank said."Year-over-year measures of core inflation ticked down to about 5 percent, and 3-month measures are around 3.5 percent. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2 percent target."
Canada's latest CPI data showed consumer inflation has decelerated further, reflecting softer energy and commodity markets and easing supply bottlenecks, but remains too high for sustainable economic growth.
The consumer price index rose 5.9 percent on year in January, slowing from 6.3 percent in December, 6.8 percent in November and a recent peak of 8.1 percent in June 2022. Prices for cellular services and passenger vehicles contributed to the deceleration in the total CPI while mortgage interest cost and prices for food continued to rise.
Two of the BoC's core inflation measures have eased slightly. The year-over-year increase in the CPI trim was 5.1 percent in January, down from 5.3 percent in December, but it is still well above 4.1 percent seen a year earlier. The annual rate in the CPI median edged down to a five-month low of 5.0 percent from 5.2 percent in December. Those measures strip out whatever is volatile at the time.
Looking ahead, it said,"With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers."
Very Tight Labor Market Conditions
As in the US, inflationary pressures are coming from sticky service prices, reflecting rising labor costs and worker shortages in some sectors.
Employment jumped 150,000 (up 0.8 percent), mostly in full-time work, in January, and the unemployment rate held steady at 5.0 percent, just above the record low of 4.9 percent reached in June and July last year.
"The labour market remains very tight," the bank noted."Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated. Wages continue to grow at 4 percent to 5 percent, while productivity has declined in recent quarters."
Slowing but Resilient Economic Growth
In the latest monthly data, Canada's economic growth was flat in the October-December quarter after the gross domestic product grew 0.7 percent in July-September for the fifth straight quarterly gain.
"With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment," the bank said."
"Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand."
GDP edged down 0.1 percent on the month in December after a 0.1 percent uptick in November, but advance information indicates that GDP rebounded 0.3 percent in January, according to Statistics Canada.
While cumulative effects of monetary policy tightening are slowing growth in Canada and elsewhere and commodity prices have evolved roughly in line with the bank's expectations,"the strength of China's recovery and the impact of Russia's war in Ukraine remain key sources of upside risk," the bank said.
"Based on its assessment of recent data, Governing Council decided to maintain the policy rate at 4.50 percent. Quantitative tightening is complementing this restrictive stance," the bank said, indicating that its policy bias is still toward tightening.
"Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2 percent target," it concluded.
The message is largely the same as in January but the wording leaves the impression that the bank is leaving its options open. In the January statement, the bank said,"If economic developments evolve broadly in line with the MPR (Monetary Policy Report) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases. Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2 percent target."
At its previous policy announcement on Jan. 25 and ensuing official comments, the bank indicated that it was pausing in tightening on condition that growth and inflation move in line with its predictions. It raised the policy rate for the eighth consecutive time in January with a 25-basis-point hike in the tightening phase that began in March aimed at bringing high inflation back to its 2 percent target. The pace was slower than 50 points in December and October, 75 points in September and 100 points in July.
Governor Tiff Macklem has repeatedly said that it is a"conditional pause" and that the bank will be prepared to raise rates further if it believes it is necessary to do so to get inflation back to target.
The bank is scheduled to announce its next monetary policy decision on April 12 and release its latest economic projections in the quarterly Monetary Policy Report.
BoC Continues to Sees 3 percent Inflation in Mid-2023
The bank maintained its projection made in January that CPI inflation will slow to 3 percent in mid-2023. It didn't refer to its latest assessment that it should return to the 2 percent target in 2024 but the projection remains valid until it provides updates on its medium-term economic forecasts in the Monetary Policy Report in April.
"Overall, the latest data remains in line with the bank's expectation that CPI inflation will come down to around 3 percent in the middle of this year," the bank said."Year-over-year measures of core inflation ticked down to about 5 percent, and 3-month measures are around 3.5 percent. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2 percent target."
Canada's latest CPI data showed consumer inflation has decelerated further, reflecting softer energy and commodity markets and easing supply bottlenecks, but remains too high for sustainable economic growth.
The consumer price index rose 5.9 percent on year in January, slowing from 6.3 percent in December, 6.8 percent in November and a recent peak of 8.1 percent in June 2022. Prices for cellular services and passenger vehicles contributed to the deceleration in the total CPI while mortgage interest cost and prices for food continued to rise.
Two of the BoC's core inflation measures have eased slightly. The year-over-year increase in the CPI trim was 5.1 percent in January, down from 5.3 percent in December, but it is still well above 4.1 percent seen a year earlier. The annual rate in the CPI median edged down to a five-month low of 5.0 percent from 5.2 percent in December. Those measures strip out whatever is volatile at the time.
Looking ahead, it said,"With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers."
Very Tight Labor Market Conditions
As in the US, inflationary pressures are coming from sticky service prices, reflecting rising labor costs and worker shortages in some sectors.
Employment jumped 150,000 (up 0.8 percent), mostly in full-time work, in January, and the unemployment rate held steady at 5.0 percent, just above the record low of 4.9 percent reached in June and July last year.
"The labour market remains very tight," the bank noted."Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated. Wages continue to grow at 4 percent to 5 percent, while productivity has declined in recent quarters."
Slowing but Resilient Economic Growth
In the latest monthly data, Canada's economic growth was flat in the October-December quarter after the gross domestic product grew 0.7 percent in July-September for the fifth straight quarterly gain.
"With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment," the bank said."
"Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand."
GDP edged down 0.1 percent on the month in December after a 0.1 percent uptick in November, but advance information indicates that GDP rebounded 0.3 percent in January, according to Statistics Canada.
Market Consensus Before Announcement
The Bank of Canada is expected to hold its policy interest rate steady after raising it by 25 basis points to 4.50 percent in January in an eighth consecutive hike in the tightening phase that began in March aimed at bringing high inflation back to its 2 percent target.
"If economic developments evolve broadly in line with the MPR (Monetary Policy Report) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases," the bank said on Jan. 25.
Governor Tiff Macklem has stressed that it is a"conditional pause" and that the bank will be prepared to raise rates further if it believes it is necessary to do so to get inflation back to target.
"If economic developments evolve broadly in line with the MPR (Monetary Policy Report) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases," the bank said on Jan. 25.
Governor Tiff Macklem has stressed that it is a"conditional pause" and that the bank will be prepared to raise rates further if it believes it is necessary to do so to get inflation back to target.
Definition
Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.
Description
Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
