The Bank of Canada met expectations by maintaining the overnight rate at 5.0%, while stating that it will continue with Quantitative Tightening (QT).
The bank highlighted the slowing in economic momentum stating, “consumption has been subdued, with softer demand for housing, durable goods and many services.” In the BoC’s accompanying Monetary Policy Report, the Bank downgraded its growth forecast to 1.2% this year (from 1.8% in July) and 0.9% in 2024 (1.2% in July).
On the persistence of high inflation, it stated that “CPI inflation has been volatile in recent months” and that “the Bank’s preferred measures of core inflation show little downward momentum.” The Bank upgraded its CPI forecast to 3.3% year-on-year (y/y) in 2023 (2.9% y/y in July), though it still sees inflation return to target in 2025.
On the future path of policy, the Bank “is concerned that progress towards price stability is slow and inflationary risks have increased”. It maintained that it is “prepared to raise the policy rate further if needed”.
Key Implications
The BoC didn’t throw any curveballs today. It acknowledged the growing evidence that economic momentum is slowing – falling retail sales, declining job vacancies, and a cooling housing market to name a few. All of this showed up in its updated forecast, where the BoC expects below-trend growth over the next twelve months. At the same time, the BoC didn’t declare victory. With wage growth running at 5% y/y and underlying inflation averaging 3.5% on a three-month annualized basis, the Bank is still leaving the door open to further hikes should economic data start to re-accelerate.
Although the BoC has painted a clear picture for why it doesn’t need to hike again, we expect its hawkish rhetoric to persist. It needs to maintain current tight financial conditions in order to achieve its forecasted slowdown. And while markets are hesitant to build in another hike, the impact of the BoC’s rhetoric has resulted in a higher for longer path for the BoC’s policy rate. This has the Canada 10-year yield sitting at its highest level since 2007.
