BoC Expected To Follow Through With Conditional Pause Pledge
- Analysts forecast rates to hold at 4.50%
- Past policy action already slowing economy
- Risks remain from tight labour market, high inflation
- Announcement due Wednesday at 15:00 GMT
By Harry Daniels
LiveSquawk News
@HarryDaniels71
7 March 2023 | 13:00 GMT
The Bank of Canada is expected to leave rates unchanged to uphold its “conditional commitment” promise when it meets Wednesday to announce its latest monetary policy decision.
The latest polls show overwhelming certainty among analysts that the central bank will follow through on its pledge to pause its year-long hiking campaign in favour of a wait-and-see policy.
January’s quarter-point increase in the overnight rate to 4.5% pushed borrowing costs to their highest levels in over a decade. The accompanying bank statement said officials expected to maintain the current course while they assessed the impact of the cumulative interest rate increases, as the “Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target and remains resolute in its commitment to restoring price stability for Canadians.”
In a client note, economists at BofA said: “The domestic economy has decelerated, led by investment and by the housing sector. The labour market remains tight, but cracks are emerging. Both headline and core inflation are now trending down, and inflation expectations remain anchored.”
Data since the last meeting appeared to justify the current stance of Ottawa policymakers. Last week, Canada said its economy contracted in real terms by 0.1% on the month and flatlined on the quarter, disappointing expectations of a slightly more positive outturn. Statistics Canada listed a fall in housing investment and business spending among reasons for the slowdown and highlighted that it coincided with higher borrowing costs. The report said, “The subsequent rise in mortgage interest rates put a damper on housing demand, as the ownership transfer costs decreased nationally by 26.3%.”
Bank of America said, “The BoC's restrictive posture is overall working as expected as the monetary transmission mechanism in Canada is stronger and quicker than in the US. Canada does not seem to need more hikes to bring inflation to the target, but the BoC may be forced to hike if the gap in policy rates with the Fed starts to cause major currency weakness.”
Possibility of higher rates remain
So, there remainupside risks around the current policy stance. Indeed, positive preliminary data covering the start of the year means any downturn in economic activity is likely to be short-lived.
The central bank is set to announce its decision ahead of this Friday’s Canadian jobs data, but policymakers are already aware of how tight the labour market still is. Analysts expect a modest 10,000 increase in employment following the 150,000 gains in January, along with a small lift in the unemployment rate to 5.1% from 5.0% last month.
A resumption of rate hikes in the months ahead is by no means off the table. As National Bank of Canada’s Taylor Schleich observed, “As the BoC and other central banks have reiterated, a tight labour market risks keeping inflation, particularly in services, elevated/sticky. On the surface then, the reported addition of 150K jobs in January after a strong Q4 doesn’t provide any relief.”
Economists at BofA concur, noting that the unemployment rate is still quite low, and inflation is still quite high, which puts upside pressure on the BoC. “But the main pressure may come from the US Fed. The Fed's job is not done yet and we expect another 75 basis points of hikes in the US. As the Fed hikes while the BoC remains on hold, the spread in real rates will widen notably, weakening Canada's policy stance.”
Nonetheless, Schleich argued that recent data had him more confident that the BoC’s pause can be sustained. “It’s true that US data has remained hot of late and that has exerted upward pressure on Canadian rates/expectations, but we think BoC-Fed policy divergence can and will continue.”
He posited that the bar for further action from the rate setters in the near term had been set high. “Even if economic/inflation data had come in hot across the board over the past six weeks, realistically, it still wouldn’t be enough of an ‘accumulation’ to force the bank into additional tightening this soon.”
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- Analysts forecast rates to hold at 4.50%
- Past policy action already slowing economy
- Risks remain from tight labour market, high inflation
- Announcement due Wednesday at 15:00 GMT
By Harry Daniels
LiveSquawk News
@HarryDaniels71
7 March 2023 | 13:00 GMT
The Bank of Canada is expected to leave rates unchanged to uphold its “conditional commitment” promise when it meets Wednesday to announce its latest monetary policy decision.
The latest polls show overwhelming certainty among analysts that the central bank will follow through on its pledge to pause its year-long hiking campaign in favour of a wait-and-see policy.
January’s quarter-point increase in the overnight rate to 4.5% pushed borrowing costs to their highest levels in over a decade. The accompanying bank statement said officials expected to maintain the current course while they assessed the impact of the cumulative interest rate increases, as the “Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target and remains resolute in its commitment to restoring price stability for Canadians.”
In a client note, economists at BofA said: “The domestic economy has decelerated, led by investment and by the housing sector. The labour market remains tight, but cracks are emerging. Both headline and core inflation are now trending down, and inflation expectations remain anchored.”
Data since the last meeting appeared to justify the current stance of Ottawa policymakers. Last week, Canada said its economy contracted in real terms by 0.1% on the month and flatlined on the quarter, disappointing expectations of a slightly more positive outturn. Statistics Canada listed a fall in housing investment and business spending among reasons for the slowdown and highlighted that it coincided with higher borrowing costs. The report said, “The subsequent rise in mortgage interest rates put a damper on housing demand, as the ownership transfer costs decreased nationally by 26.3%.”
Bank of America said, “The BoC's restrictive posture is overall working as expected as the monetary transmission mechanism in Canada is stronger and quicker than in the US. Canada does not seem to need more hikes to bring inflation to the target, but the BoC may be forced to hike if the gap in policy rates with the Fed starts to cause major currency weakness.”
So, there remain upside risks around the current policy stance. Indeed, positive preliminary data covering the start of the year means any downturn in economic activity is likely to be short-lived.
The central bank is set to announce its decision ahead of this Friday’s Canadian jobs data, but policymakers are already aware of how tight the labour market still is. Analysts expect a modest 10,000 increase in employment following the 150,000 gains in January, along with a small lift in the unemployment rate to 5.1% from 5.0% last month.
A resumption of rate hikes in the months ahead is by no means off the table. As National Bank of Canada’s Taylor Schleich observed, “As the BoC and other central banks have reiterated, a tight labour market risks keeping inflation, particularly in services, elevated/sticky. On the surface then, the reported addition of 150K jobs in January after a strong Q4 doesn’t provide any relief.”
Economists at BofA concur, noting that the unemployment rate is still quite low, and inflation is still quite high, which puts upside pressure on the BoC. “But the main pressure may come from the US Fed. The Fed's job is not done yet and we expect another 75 basis points of hikes in the US. As the Fed hikes while the BoC remains on hold, the spread in real rates will widen notably, weakening Canada's policy stance.”
Nonetheless, Schleich argued that recent data had him more confident that the BoC’s pause can be sustained. “It’s true that US data has remained hot of late and that has exerted upward pressure on Canadian rates/expectations, but we think BoC-Fed policy divergence can and will continue.”
He posited that the bar for further action from the rate setters in the near term had been set high. “Even if economic/inflation data had come in hot across the board over the past six weeks, realistically, it still wouldn’t be enough of an ‘accumulation’ to force the bank into additional tightening this soon.”