The Bank of Canada maintained the overnight rate at 4.5%, while stating that it will continue with Quantitative Tightening (QT).
Regarding recent economic data, the Bank stated that “restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.”
Although employment growth has been robust, it focused on how “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.”
All told, the inflation story remains intact, with the BoC still expecting “that CPI inflation will come down to around 3% in the middle of this year.”
On the future path of policy, nothing changed as the Bank is “prepared to increase the policy rate further if needed.”
Key Implications
Today was always set to be a placeholder meeting. The BoC had clearly communicated it would hit pause its hiking cycle and let the economy absorb the impact of 425 basis points of monetary policy tightening over the last year. The only thing to analyze was how firm the BoC would be on reinforcing the possibility of further hikes should incoming data prove stronger than expected. Today’s announcement shows that the BoC isn’t in a rush to start hiking again.
The BoC’s actions over the last year have been effective in reining in inflation, with CPI expected to move from 5.9% year-on-year in January, to 3% this summer, and potentially towards 2% later this year. Higher rates have also taken a big bite out of the interest rate sensitive parts of the economy, with the real estate market still in the process of finding a bottom.
The issue is that this hasn’t played out in the broader economy. There has been a significant upswing in the jobs market, with employers hiring at a breakneck pace. This is happening alongside a massive surge in government payouts to households, filling the wallets of Canadians and sending them on a spending spree. This is juicing the economy at a time when the BoC needs to see the opposite. Should this momentum continue, it could cause inflation to spike again, forcing the BoC back into hiking mode in the coming months.
