The Bank of Canada maintained 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, “economic growth stalled through the middle quarters of 2023 (and that) higher interest rates are clearly restraining spending”. The Bank also noted that the labour market has cooled, as “job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly.”
On the improvement in inflation, it stated that “the slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices”. It did hedge this by stating that “shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs.”
On the future path of policy, the Bank “is still concerned about risks to the outlook for inflation” and maintained the statement that it “remains prepared to raise the policy rate further if needed”.
Key Implications
A hold today was the only option for the BoC. Given the economic backdrop, the BoC has likely gained greater confidence that its policy stance is sufficiently restrictive. There has been obvious weakness emanating from the housing market for a while now, but more recently, consumer spending has slowed alongside a further cooling in the labour market. But with inflation still above 3%, we get why the BoC isn’t ready to declare victory. Instead, the BoC seems like it is preparing to sit on the sidelines for the next couple of months while maintaining its cautious rhetoric.
Markets don’t think the BoC will be able to get too comfortable. The next move is clearly a cut, with odds pointing to the first move in April. We agree. The next few months are going to be challenging given our expectation that the unemployment rate will continue to rise, which will hit consumer spending and bring inflation down along with it. No wonder the Canada 2- and 10-year yields have fallen approximately 90 basis points over the last two months.
