MNI BOC WATCH: Staying The Course In Cooling Economy

The Bank of Canada will maintain a cautious tone Wednesday as it holds official interest rates at their highest levels since 2001 for a third straight meeting, likely retaining some language about lingering inflation risks but also nodding to softer economic growth.

All 20 economists surveyed by MNI see the target rate on overnight loans between commercial banks remaining 5% in the announcement from Ottawa at 10am. The year's last rate meeting ends with the smaller one-page statement and no new economic forecasts, though Deputy Governor Toni Gravelle gives a day-after speech and press conference in Windsor, Ontario.

Overheated demand is cooling in line with the Bank's forecast while inflation is slowing but has been above target for almost three years. Officials at the last decision split on the need for another rate hike, and might feel that giving up on future increases altogether could re-kindle one of the world’s most stretched housing markets and encourage inflationary government deficits. Shifting focus to a high-for-long stance is also tricky at a time when the Bank may need to battle stagflation or the economy buckling under the drag of 10 prior rate hikes.

Recent data have shown signs of the slowing demand Governor Tiff Macklem says is needed, but also evidence that wages, prices and inflation expectations remain outside the Bank's 1% to 3% target band. Officials in October boosted their inflation forecast even while cutting 2024 growth and suggested they are less certain CPI will return to 2% around the middle of 2025. Judging the tightness of Canada’s economy is further complicated with the biggest influx of immigrants in decades. (See: MNI INTERVIEW: BOC Path Tied To Core Prices- Laurier's Siklos)

THE PAIN IS REAL

The last inflation report showed CPI slowing to 3.1% while core rates remained higher. In the labor market unemployment hitting a nearly two-year high has done little to pull wage growth below the 5% mark the Bank calls inconsistent with price stability as worker productivity keeps falling. Quarterly GDP figures Thursday were also messy with the second quarter revised to growth from a contraction, output falling in the third quarter and a flash estimate showing an October rebound. (See: MNI INTERVIEW:Productivity Curbs BOC Cut Enthusiasm-Ex Adviser)

The Bank recently expressed concern about even short-term inflation expectations and Macklem called attention to widespread strikes and dangers of repeating policy errors of the 1970s in a year when unionized autoworkers won huge wage gains and cost-of-living allowances. Families have some reason to expect more high prices-- groceries cost 5.4% more in October than a year ago and mortgage costs are rising at a record a 30% clip.

Investors see almost no chance of another rate hike and are focused on whether this phrase will be watered down to reflect a slowing economy and set the stage for a cut around mid-2024: "Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed." (See: MNI INTERVIEW: BOC To Delay Rate Cuts And Move Slow- Alexander)

Macklem has consistently said talk of rate cuts is premature without clear evidence inflation will move back to target, after earlier this year signaling a pause before hiking twice more. "The pain is real, and inflation is not going away by itself. That’s why it is so important that we stay the course and restore price stability. We have already come a long way," he said in a recent speech.

Headline and "Median" Core Inflation