MNI BOC WATCH: Macklem Still Looks To Hike, Wants Slower Core
The Bank of Canada remains prepared to raise interest rates again because the economic slowdown may not do enough to subdue inflation, while officials left borrowing costs at the highest since 2001 for a third straight meeting Wednesday.
"Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed," according to the statement coming in at just 525 words, among the shorter ones in recent memory. "Governing Council wants to see further and sustained easing in core inflation." All 20 economists surveyed by MNI predicted the 5% benchmark would remain in place.
Output "stalled" in recent quarters and is no longer showing excess demand, the Bank said, also noting wage gains are still running as fast as 5% and core prices are almost double the Bank's 2% inflation target. The statement had no clear nod to a potential shift to rate cuts many economists have been incorrectly forecasting over most of 2023, when in reality Governor Tiff Macklem had hiked twice more mid-year following an attempted pause. The Bank on Wednesday kept its list of factors to watch including economic slack, inflation expectations, wages and how fast companies raise prices.
Families have some reason to keep expecting high prices. While headline CPI has slowed to 3.1% the prices of food purchased from stores rose 5.4% in October and mortgage interest costs are still rising at about record a 30% pace. Inflation has been above target for almost three years now and the Bank's October forecast expressed less confidence inflation will return to target in mid-2025. Officials at the last decision also split on the need for another rate hike, though there was a consensus to show patience to judge the drag of 10 prior increases.
"The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices" including gasoline, the Bank's statement said. "However, shelter price inflation has picked up." The statement also removed a line from the last decision saying inflationary risks had increased.
The IMF and OECD warn central banks must keep high-for-long rates because of sticky core inflation while some Fed and BOE officials have said it's too soon to look at loosening monetary policy. Canadian officials did ratify some weaker global trends such as slower price gains, a recent decline in crude oil and easier financial conditions.
Judging the tightness of Canada’s economy is complicated by the biggest influx of immigrants in decades boosting labor supply and creating more demand. While unemployment has climbed from record lows much of that is tied to population growth. Demands for big pay hikes were underlined by a recent offer to Ford's autoworkers for a 15% raise over three years and revived talk of a contract with 1970s-style cost of living allowances, and the province of Quebec is in the middle of a massive strike by public sector workers.
"The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly," the Bank said. The word modestly is a bit more sanguine than private economists worried that job losses may trigger a big shock to heavily indebted consumers.
Some investors bet the BOC may start cutting as soon as the second quarter of next year. Further tightening does risk slamming the brakes on an economy some experts say is falling into recession and putting more pressure on one of the world’s most stretched housing markets. Politicians are also blaming the Bank for the economic slowdown created by its tightening so far. "The Bank remains resolute in its commitment to restoring price stability for Canadians," the statement said.