Highlights
In its quarterly Monetary Policy Report released Wednesday, the bank forecast that Canada's GDP growth will pick up to an annualized pace of 2.3 percent (revised up from 0.5 percent forecast in January) in the first quarter of 2023 after showing no growth in the final quarter of 2022. But it also projected that the growth rate will slow to 1.0 percent in the second quarter.
The latest data showed that the Canadian economy rebounded a sharp 0.5 percent on the month in January, thanks to mild weather and solid consumption on services, following a slight 0.1 percent contraction in December, and Statistic Canada's advance estimate showed GDP gained 0.3 percent in February.
The bank raised its 2023 GDP growth forecast to 1.4 percent from 1.0 percent projected in January while revising down its 2024 growth forecast to 1.3 percent from 1.8 percent. In its first estimate, the bank forecast Canada's economic growth will pick up to 2.5 percent in 2025.
"Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year," the bank said."This implies the economy will move into excess supply in the second half of this year."
The International Monetary Fund this week forecast that global economic growth will decelerate from 3.4 percent in 2022 to 2.8 percent in 2023 while advanced economies will see a more pronounced slowdown from 2.7 percent in 2022 to 1.3 percent in 2023."In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent," the IMF said.
The bank maintained its projection made in January and March that CPI inflation will slow to 3 percent in mid-2023, noting that CPI inflation eased to 5.2 percent in February, and the bank's preferred measures of core inflation were just under 5 percent.
The bank said it expects CPI inflation to fall"quickly" to around 3 percent in the middle of this year and then decline"more gradually" to the 2 percent target by the end of 2024.
Its consumer inflation outlook for 2023 is 3.5 percent, little changed from 3.6 percent projected in the previous report issued in January. The consumer price index jumped 6.8 percent in 2022 after a 3.4 percent rise in 2021.
As for the CPI in 2024, the bank forecast the annual inflation rate will drift down to 2.3 percent, just above its 2 percent target and unchanged from its January projection. The bank's first CPI estimate for 2025 is 2.1 percent.
"Recent data is reinforcing Governing Council's confidence that inflation will continue to decline in the next few months," it said,"However, getting inflation the rest of the way back to 2 percent could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize."
"As it sets monetary policy, Governing Council will be particularly focused on these indicators, and the evolution of core inflation, to gauge the progress of CPI inflation back to target."
Two of the BoC's core inflation measures have been easing gradually. The year-over-year increase in the CPI trim was 4.8 percent in February, down from 5.1 percent in January, but it is still above 4.1 percent seen at the start of 2022. The annual rate in the CPI median edged down to 4.9 percent in February from 5.0 percent the previous month, but is well above 3.5 percent in January 2022, when the world had not seen the impact of Russia's invasion of Ukraine on energy and commodity prices. Those measures strip out whatever is volatile at the time.
The latest data showed that the Canadian economy rebounded a sharp 0.5 percent on the month in January, thanks to mild weather and solid consumption on services, following a slight 0.1 percent contraction in December, and Statistic Canada's advance estimate showed GDP gained 0.3 percent in February.
The bank raised its 2023 GDP growth forecast to 1.4 percent from 1.0 percent projected in January while revising down its 2024 growth forecast to 1.3 percent from 1.8 percent. In its first estimate, the bank forecast Canada's economic growth will pick up to 2.5 percent in 2025.
"Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year," the bank said."This implies the economy will move into excess supply in the second half of this year."
The International Monetary Fund this week forecast that global economic growth will decelerate from 3.4 percent in 2022 to 2.8 percent in 2023 while advanced economies will see a more pronounced slowdown from 2.7 percent in 2022 to 1.3 percent in 2023."In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent," the IMF said.
The bank maintained its projection made in January and March that CPI inflation will slow to 3 percent in mid-2023, noting that CPI inflation eased to 5.2 percent in February, and the bank's preferred measures of core inflation were just under 5 percent.
The bank said it expects CPI inflation to fall"quickly" to around 3 percent in the middle of this year and then decline"more gradually" to the 2 percent target by the end of 2024.
Its consumer inflation outlook for 2023 is 3.5 percent, little changed from 3.6 percent projected in the previous report issued in January. The consumer price index jumped 6.8 percent in 2022 after a 3.4 percent rise in 2021.
As for the CPI in 2024, the bank forecast the annual inflation rate will drift down to 2.3 percent, just above its 2 percent target and unchanged from its January projection. The bank's first CPI estimate for 2025 is 2.1 percent.
"Recent data is reinforcing Governing Council's confidence that inflation will continue to decline in the next few months," it said,"However, getting inflation the rest of the way back to 2 percent could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize."
"As it sets monetary policy, Governing Council will be particularly focused on these indicators, and the evolution of core inflation, to gauge the progress of CPI inflation back to target."
Two of the BoC's core inflation measures have been easing gradually. The year-over-year increase in the CPI trim was 4.8 percent in February, down from 5.1 percent in January, but it is still above 4.1 percent seen at the start of 2022. The annual rate in the CPI median edged down to 4.9 percent in February from 5.0 percent the previous month, but is well above 3.5 percent in January 2022, when the world had not seen the impact of Russia's invasion of Ukraine on energy and commodity prices. Those measures strip out whatever is volatile at the time.
Definition
Since 2009 the Bank of Canada (BoC) has regularly updated its economic view via a quarterly Monetary Policy Report. This presents base-case projections for inflation and growth in the Canadian economy as well as an assessment of the risks. The forecast provides a platform upon which the monetary authority can base its decisions with regards to any changes in official interest rates (and/or unconventional monetary instruments).
Description
Each quarter, the MPR gives the financial markets a view of the BoC's governing council thinking. This provides important guidance especially since the BoC does not publish minutes from its policy setting meetings. The report is released at the same time as the policy announcement is made.
