MNI BOC WATCH: Macklem To Affirm Hold As Economy Rumbles Ahead

Bank of Canada policymakers on Wednesday will likely affirm they are holding interest rates unless inflation bubbles up again, widening rhetorical gaps with U.S. and European officials talking about hikes and investors seeing cuts in the months ahead.

Governor Tiff Macklem appears set to keep language about the drag of eight prior rate hikes pulling back a strong economy, and another increase only being justified by a run of evidence inflation is getting stuck well above target. All 22 economists surveyed by MNI see the rate unchanged at 4.5% for a second meeting in the decision due at 10am EST, followed an hour later by a press conference.

Canada held rates at the highest since 2007 last month and Macklem said he's likely done with inflation expected to slow to 3% by midyear and to the 2% target in 2024. Inflation moderated to 5.2% in February from 6.8% three months earlier and officials have said Canada can plot its own course on rates because local price gains are about the lowest across major economies.

Dropping language about a potential hike even following the SVB collapse could be unwise after officials said they are more concerned with upside inflation risks with prices staying hot for so long. (See: MNI INTERVIEW: BOC Pause Case Boosted By SVB Collapse: Antunes) Most firms see inflation running much faster than 2% until at least 2025, the Bank reported April 3, and a separate survey showed households saw 6% inflation a year from now.

HOLDING THE LINE

Growth has also remained strong versus a consensus for a mild recession, gaining 0.5% in January and a flash estimate of a 0.3% February expansion. That could bring Q1 growth beyond a 2% annualized pace versus the Bank's estimated 0.5%. Unemployment meanwhile is near a record low and wage gains of 5% are what the Bank calls inconsistent with restoring sustainable 2% inflation.

Economists generally see the Bank holding at 4.5% for the rest of this year, though a handful see a cut late this year. (See: MNI INTERVIEW: BOC Seen Pausing Rest of Yr- CD Howe's Robson) Futures trading at the end of last week showed about an 80% chance of a quarter-point rate cut by the end of June, while officials have said it’s far too early to look at that given still elevated inflation.

Former officials have told MNI that the early inflation declines are linked to the “base effect” as price jumps tied to the Ukraine war and the post-Covid rebound fall out of the 12-month CPI, and getting inflation all the way back to 2% will be harder.

“Look for policymakers to hold the line next week, leaving the policy rate at its elevated level and quantitative tightening on autopilot, as they wait for tighter monetary conditions to work their way through the economy. They’ll keep the door open to more hikes, but the recent banking sector turmoil raises the bar to unleash any more rate increases,” Desjardins strategist Royce Mendes wrote in a research note.

The central bank sets interest rates to keep inflation in the middle of a 1%-3% target band and to bring things back to normal within two years. Policymakers say their policy has become restrictive and will become more so this year as the lagged impact of its increases take hold.

FULL PUNCH

That includes the full punch of its 100bp hike last July which that will still influence mortgage and other loan renewals in coming months. With Canadians holding debts now worth more than the nation's GDP, there's also risk that tighter policy will create economic and financial instability.

Other what-ifs in the decision include Canada’s weaker dollar over the last year as a potential source of inflation, though it’s made up some ground since the last decision. The recent jump in crude oil prices following the OPEC+ production cutbacks could boost headline inflation for Canada but also comes with an offset of boosting the value of energy exports.

Investors would welcome more details about Deputy Governor Toni Gravelle's recent speech saying QT could wrap up around the end of next year or the first half of 2025 while the ample reserves policy may keep up to an extra CAD60 billion of settlement balances in the system.