Slowing economy allows Governor wait for the drag from ten prior rate hikes.
Policymakers want to avoid overtightening with inflation down more than half from a peak 8.1% last June, and are also cautious about giving another rate-pause signal like the one abandoned earlier this year. The need for restrictive policy remains with the Bank seeing inflation above the 2% target until mid-2025, the economy defying bets of a recession and wage gains staying hot as unemployment climbs from record lows.
Canada's Q2 GDP growth posted a surprising 0.2% annualized decline after a revised 2.6% gain for Q1, reaffirming expectations for a pause. Still, consumer spending on big-ticket items has surprised Macklem following rate hikes including a shock 100bp move in July of last year.
Canada's consumer price index quickened to 3.3% from 2.8% in July, taking it back outside the Bank's 1% to 3% target range, and core prices are gaining about 3.6%.
FLOODS AND FIRES
The prospect of a major inflation flare-up requiring a hike next week appears diminished by worries about slower growth in the United States and, even more acutely, in China. The BOC can instead hold for now and if needed use a "high for longer" strategy to keep inflation at bay. Many investors have already pushed back forecasts for a rate cut until the middle part of next year.
Officials have indicated a phase of tight policy by warning that allowing embedded inflation would force much tougher policy down the road and listing upside risks like wage demands, stubborn service prices and shifting price expectations. Inflation has already topped 2% since March of 2021 and the Bank’s latest quarterly survey found households saw CPI at 5.1% a year from now and 3.9% in two years.
New supply-chain challenges are also emerging like flooding in Nova Scotia, wildfires shutting down Alberta energy production and a strike at the nation’s biggest port in Vancouver. Government program spending is also up 10% from a year ago. (See: MNI INTERVIEW:Trudeau Pushes BOC To High-For-Long Rate-Asselin)
Judging the economy's tightness is complicated, with the biggest immigration wave in decades boosting labor supply and creating more demand. BOC tightening also carries the risk of slamming the brakes on the economy and straining one of the world’s most stretched housing markets. A handful of forecasters still see Canada heading for a mild recession.
Macklem and his deputies "agreed they were prepared to raise the policy rate further if inflationary pressures did not ease as projected and progress toward the 2% target stalled, but they did not want to do more than they had to," according to minutes from July's decision. Macklem also told reporters in July “it’s clearly too early to be talking about interest-rate cuts.”
Source: Bank of Canada