Highlights
In its quarterly Monetary Policy Report, the Bank of Canada forecasts that Canada's GDP grew at an annualized pace of 0.8 percent in the July-September quarter (data due Nov. 30), revised down from 1.5 percent growth projected in July. Its first estimate for October-December GDP is 0.8 percent growth.
"Growing evidence shows that past interest rate increases are working to bring demand and supply back into balance," the bank said."GDP growth has averaged 1 percent over the past year, lower than the rate of potential output growth."
The economy made a weak start to the third quarter, with the GDP showing flat growth on quarter in July after falling 0.2 percent in June. In its advance estimate, Statistics Canada sees the GDP edged up 0.1 percent in August.
Contrary to the bank's 1.5 percent growth forecast, the Canadian economy contracted in April-June, being flat (-0.0 percent) on quarter, or falling an annualized 0.2 percent, as household spending lost some steam after surging in the previous quarter. It was also due to a decline in housing activity and the drag from wildfires in many regions of the country.
For the whole year, the bank revised down its 2023 GDP growth forecast to 1.2 percent from 1.8 percent projected in July while revising down its 2024 growth forecast to 0.9 percent from 1.2 percent. The bank forecast Canada's economic growth will pick up to 2.5 percent in 2025, revised up slightly from its estimate of 2.4 percent made about three months ago.
The bank's latest consumer inflation outlook for 2023 is 3.9 percent, up from 3.7 percent projected in July. The consumer price index surged 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 remain high at 3.0 percent, revised up from 2.5 percent projected in July and still above its 2 percent target. The bank's CPI estimate for 2025 is 2.2 percent, little changed from 2.1 percent projected three months ago.
CPI inflation has fluctuated between 2.8 percent and 4.0 percent after having dropped significantly from its peak of 8.1 percent in June 2022."Although price pressures are easing for some goods and services, core inflation is proving to be more stubborn than anticipated," the bank said in the October report.
On the impact of fiscal policy on sticky inflation, Macklem said government spending over the past year has been below 2%, Canada's potential output, which means it is not adding undue inflationary pressures.
But for 2024, the bank estimates that combined spending by the federal and provincial governments would grow 2.5%, he said, adding,"In an environment where we are trying to moderate spending and get inflation down, that's not helpful."
"It would be helpful if the governments considered the inflationary impact of their spending decisions," Macklem said."It's going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction.
Among the upside risks to the bank's main inflation scenario is heightened geopolitical risks, although part of the oil price increase has been built into the bank's projection. The war in Israel and Gaza has not impacted the supply of crude oil but if it were to spread further into a broader regional conflict, global oil supplies could be disrupted and oil prices would rise amid low inventories, the report said.
"If such a rise in oil prices materializes and is sustained, pass-through to
other prices may occur," the bank warned."Inflation could climb sharply, particularly in a context in which businesses change prices frequently. Heightened geopolitical uncertainties may also create new cost pressures by affecting the global supply chains for goods and raw materials."
The governor said the bank's policymakers need to be more cautious than normal about seeing through the impact on core inflation.
"If we saw evidence that higher energy prices were passing through to broader prices, higher transportation costs for example. That would be a signal that the increase in oil prices is starting to feed through to the rest of the economy. That would be really something of concern to us."
Downside risks would come from a faster-than-expected slowdown in the Canadian economy if the effects of domestic and global credit tightening proved to be larger than anticipated.
Macklem said the impact of the heightened geopolitical risks on consumer spending patterns is hard to assess and needs to be closely watched.
"Growing evidence shows that past interest rate increases are working to bring demand and supply back into balance," the bank said."GDP growth has averaged 1 percent over the past year, lower than the rate of potential output growth."
The economy made a weak start to the third quarter, with the GDP showing flat growth on quarter in July after falling 0.2 percent in June. In its advance estimate, Statistics Canada sees the GDP edged up 0.1 percent in August.
Contrary to the bank's 1.5 percent growth forecast, the Canadian economy contracted in April-June, being flat (-0.0 percent) on quarter, or falling an annualized 0.2 percent, as household spending lost some steam after surging in the previous quarter. It was also due to a decline in housing activity and the drag from wildfires in many regions of the country.
For the whole year, the bank revised down its 2023 GDP growth forecast to 1.2 percent from 1.8 percent projected in July while revising down its 2024 growth forecast to 0.9 percent from 1.2 percent. The bank forecast Canada's economic growth will pick up to 2.5 percent in 2025, revised up slightly from its estimate of 2.4 percent made about three months ago.
The bank's latest consumer inflation outlook for 2023 is 3.9 percent, up from 3.7 percent projected in July. The consumer price index surged 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 remain high at 3.0 percent, revised up from 2.5 percent projected in July and still above its 2 percent target. The bank's CPI estimate for 2025 is 2.2 percent, little changed from 2.1 percent projected three months ago.
CPI inflation has fluctuated between 2.8 percent and 4.0 percent after having dropped significantly from its peak of 8.1 percent in June 2022."Although price pressures are easing for some goods and services, core inflation is proving to be more stubborn than anticipated," the bank said in the October report.
On the impact of fiscal policy on sticky inflation, Macklem said government spending over the past year has been below 2%, Canada's potential output, which means it is not adding undue inflationary pressures.
But for 2024, the bank estimates that combined spending by the federal and provincial governments would grow 2.5%, he said, adding,"In an environment where we are trying to moderate spending and get inflation down, that's not helpful."
"It would be helpful if the governments considered the inflationary impact of their spending decisions," Macklem said."It's going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction.
Among the upside risks to the bank's main inflation scenario is heightened geopolitical risks, although part of the oil price increase has been built into the bank's projection. The war in Israel and Gaza has not impacted the supply of crude oil but if it were to spread further into a broader regional conflict, global oil supplies could be disrupted and oil prices would rise amid low inventories, the report said.
"If such a rise in oil prices materializes and is sustained, pass-through to
other prices may occur," the bank warned."Inflation could climb sharply, particularly in a context in which businesses change prices frequently. Heightened geopolitical uncertainties may also create new cost pressures by affecting the global supply chains for goods and raw materials."
The governor said the bank's policymakers need to be more cautious than normal about seeing through the impact on core inflation.
"If we saw evidence that higher energy prices were passing through to broader prices, higher transportation costs for example. That would be a signal that the increase in oil prices is starting to feed through to the rest of the economy. That would be really something of concern to us."
Downside risks would come from a faster-than-expected slowdown in the Canadian economy if the effects of domestic and global credit tightening proved to be larger than anticipated.
Macklem said the impact of the heightened geopolitical risks on consumer spending patterns is hard to assess and needs to be closely watched.
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.
