MNI BOC WATCH: Macklem Seen On Hold, Affirming Longer Pause
Strong job market and slowing but elevated inflation give little reason to alter rate guidance.
The Bank of Canada is widely expected to leave interest rates unchanged at the highest level since 2007 Wednesday, reaffirming policymakers are done hiking unless inflation becomes stickier, with focus on how the statement frames risks around a hot job market and stalled economic growth.
The overnight rate on loans between commercial banks will remain at 4.5% according to all 22 economists surveyed by MNI. Experts also see little reason to change the last statement's key phrase -- the Bank probably won't hike again following eight consecutive moves and officials want to see how the economy responds to the strongest tightening cycle in decades.
While there's uncertainty around when inflation returns to the 2% target, recent data has solidified the view price gains have peaked and will continue fading. The Bank could reiterate its view CPI will slow to 3% in the middle of this year, either in the decision Wednesday or the "report card" speech and press conference Thursday with Senior Deputy Carolyn Rogers. (See: MNI INTERVIEW:BOC Sees Soft Landing In GDP Stall- Ex Govt Econ)
Policymakers have also said inflation will hit 2% sometime in 2024, though upside risks remain more important with price gains still running around 6%. Backing the case for slowing inflation is the GDP stall in the fourth quarter that lagged the Bank's forecast of a 1.3% annualized gain, helping pull back an overheated economy.
NEGATIVE REAL RATE
Governor Tiff Macklem has also said the economy could be flat in the first three quarters of this year and he's balancing risks of over- and under-tightening. The Bank's January hike of a quarter point matched the smallest move in a cycle that included a 100bp jump in July.
One challenge in the statement is squaring inflation and growth data with the job market. Employment gains shattered all forecasts in January and February, keeping wage gains above 4% and unemployment near record lows. The Bank may continue to downplay other survey data showing elevated inflation expectations by saying longer-term measures remain somewhat modest.
Canada’s policy rate remains negative versus the current rate of CPI and some measures of consumer inflation expectations over the next year or two.
Inflation slowed to 5.9% in January from 6.3% in December and June's 8.1% peak, led by the "base effect" comparison to last year's price jump around the Ukraine war. The Bank sets interest rates to keep inflation in the middle of a 1%-3% band and return to target within two years, and price gains have already topped 2% since March of 2021.
'ACCUMULATION OF EVIDENCE'
Canada is moving to the sidelines as Fed and ECB officials crank up rhetoric about the need for more hikes to subdue inflation, which central bankers during the upswing argued was a global and not a local phenomenon. While Canada's dollar could weaken if the Bank of Canada lags expected Fed hikes, Deputy Paul Beaudry said in a recent speech the currency could also strengthen over time if investors see inflation coming down faster in Canada.
Investors haven't been so resolute about a long pause in Canada, betting earlier this year on a rate cut towards the end of 2023 and more recently some saying a final quarter-point hike is possible in the next few months. Ex officials have told MNI the more likely case is a cut towards year-end. (See: MNI INTERVIEW: BOC Has Strong Case to Cut This Year-Ex Adviser and MNI INTERVIEW: BOC Seen Pausing Rest of Yr- CD Howe's Robson)
Canadians have racked up debts now worth more than the nation's GDP, raising the risk that tighter policy will do more than just cool demand.
Officials in January had no recorded discussions of hiking 50bps or a potential rate cut later this year, according to the first-ever set of published meeting minutes. The notes showed the decision to hike 25bps and signal a pause underlined officials "would need an accumulation of evidence" before considering another increase.