MNI BOC WATCH: Macklem Says Debate Shifts To How Long To Hold

The Bank of Canada moved language about another potential interest-rate hike from the decision statement to press remarks by the Governor now being released at the same time, with Tiff Macklem also saying debate is shifting to how long the official rate should remain at the highest since 2001 at 5% amid stubborn core inflation and a sluggish economy that returns headline CPI to target next year.

Shifting the guidance to the press statement inches towards the interest-rate cuts that investors expect around mid-year and is a bit more dovish than some economists had predicted. Officials continued to stress the path back to 2% inflation has key upside risks such as elevated wage gains and global conflicts. Investors had already written off the Bank's last few statements warning about another potential hike to a rate that's already been on hold since July.

"The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation," the Bank's rate decision Wednesday from Ottawa said. "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 Bank's comments didn't make any explicit reference to a potential rate cut.

The Governor's opening statement for his press conference at 1030am EST said "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 it needs to stay at the current level."  

"That doesn’t mean we have ruled out further policy rate increases," Macklem said. "If new developments push inflation higher, we may still need to raise rates. But what it does mean is that if the economy evolves broadly in line with the projection we published today, I expect future discussions will be about how long we maintain the policy rate at 5%."

Inflation is still seen returning to 2% sometime in 2025, and remaining around 3% in the first half of this year and 2.5% in the second half. The Bank's quarterly economic forecast lowered the projection for inflation over this year to 2.8% from 3% and the estimated average for CPI in 2025 remained at 2.2%. Economic growth will "remain flat in the near term" and there is now modest slack, Macklem said.

Turning much more dovish is difficult after consumer prices quickened in December even with unemployment rising and growth stalling over the second half of last year. Core inflation remains around the 3.5% pace officials had said is at odds with returning headline inflation to target. The Bank's own surveys last Monday show a majority of firms see CPI topping 3% over the next two years. Wage bargaining has also become aggressive with inflation running above target for almost three years.

"Monetary policy is working to relieve price pressures, and we need to stay the course," he said. "Inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work."

Canada's outlook is also complicated by shocks outside the Bank's control, even beyond global conflicts that could boost commodity prices. Record immigration is changing the economy's potential, the housing market remains one of the world's most overstretched and a federal government seeking re-election next year could add inflationary spending.

The Bank is continuing quantitative tightening that allows maturing assets built up during the pandemic to roll off the books, and some investors say that policy will need to taper off later this year to keep enough reserves in the system.