Discussions move from how high to how long
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The Bank of Canada held its key overnight interest rate at five per cent for the fourth consecutive time, as inflation remains higher than desired and economic growth has not slowed enough to warrant a cut.
“The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” the central bank said in a Jan. 24 statement.
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“Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”
The central bank did, however, signal a shift in discussions.
“With overall demand in the economy no longer running ahead of supply, governing council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability to how long to stay at the current level,” Bank of Canada governor Tiff Macklem said during a Jan. 24 news conference.
However, he said this doesn’t mean the central bank has ruled out rate increases, if necessary.
“We may still need to raise rates,” Macklem said, echoing caution that has characterized previous hold decisions.
Nevertheless, many economists expect the Bank of Canada will begin to trim interest rates later this year after a record run-up since early 2022, given Canada’s tepid economy and the central bank’s own outlook.
In response to questions from media about the timing of a potential cut, which market signals and some economists anticipate will come as early as April or June, Macklem declined to spell out a timeline.
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“I worry that putting it on a calendar, it’s a false sense of precision,” he said, adding that there have been mixed economic indicators over several quarters.
“In the months ahead, we will continue to see this push and pull” between economic indicators, he said.
Moreover, he said rate hikes this past summer are still working their way through the system.
“We need to give these higher rates time to do their work,” Macklem said.
Total CPI inflation stood at 3.4 per cent in December 2023, above the central bank’s target rate of two per cent, with shelter costs the biggest contributor to above-target inflation.
One metric Macklem said could cause rates to be raised again, rather than lowered, is an unexpected surge in house prices. This is not in the Bank of Canada’s base case projection for inflation and growth in the Canadian economy, he said.
The decision to hold rates on Jan. 24 drew a forecast of more activity in the real estate market from Christopher Alexander, president of RE/MAX Canada, who called the Bank’s decision “a welcomed one” for many Canadian homebuyers.
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“We might see a boost in housing market activity, especially for those that have been taking a ‘wait and see’ approach and are waiting for the right time to re-enter the market,” Alexander said. “This could very likely result in an active first quarter of 2024 and a strong spring market, reminiscent of what we experienced at the top of the pandemic in early 2020.”
James Orlando, senior economist at Toronto-Dominion Bank, said while the central bank is not ready to set timing on a rate cut, markets are signalling it happening in either April or June.
We echo this sentiment,” he said in a note after the Bank’s announcement.
“(With) the realization that the BoC can’t set policy just based on elevated shelter inflation, it is clear that the central bank is getting ready to signal a rate cut in the coming months,” he wrote.
Part of the reason so many are expecting a cut is Canada’s tepid economic growth. And while the global economic picture is brighter, Bank of Canada officials have cited ongoing geopolitical risks, with wars in the Middle East and Russia-Ukraine as well as shipping disruptions in the Red Sea, as a concern.
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“In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024,” the central bank said in its Jan. 24 statement.
“Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted.”
But while labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs are being created at a slower rate than population growth, wages are still rising by around four to five per cent.
The Bank of Canada expects economic growth to strengthen gradually around the middle of 2024.
“In the second half of 2024, household spending will likely pick up and exports and business investment should get a boost from recovering foreign demand,” the central bank said in the statement, adding that spending by governments will contribute materially to growth through the year.
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“Overall, the bank forecasts GDP growth of 0.8 per cent in 2024 and 2.4 per cent in 2025, roughly unchanged from its October projection.”
As for global growth, the Canada’s central bank forecasts global GDP growth of 2.5 per cent in 2024 and 2.75 per cent in 2025.
“With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025,” the Bank of Canada said in its Jan. 24 statement.
• Email: bshecter@postmedia.com
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Bank of Canada holds interest rate at 5%, but signals shift in direction - Financial Post
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