The Bank of Canada left interest rates unchanged for the second straight meeting, saying recent data is reinforcing its confidence that inflation will continue to slow.
(Bloomberg) — The Bank of Canada left interest rates unchanged for the second straight meeting, saying recent data is reinforcing its confidence that inflation will continue to slow.
Policymakers led by Governor Tiff Macklem held the overnight lending rate at 4.5% on Wednesday, in line with the expectations of economists in a Bloomberg survey. They reiterated that they’re still prepared to increase rates if needed.
The loonie rallied and bonds yields jumped, with the two-year benchmark note at 3.787% at 10:44 a.m. in Ottawa. It had briefly traded below 3.7% earlier Wednesday.
The central bank upgraded its growth projections for this year in a new forecast that suggests the odds of a soft landing have gone up. That may temper market expectations for a rate cut, which swaps traders are pricing in later this year.
“Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target,” the bank said.
The statement suggests officials are comfortable waiting for more data before making any further changes to their monetary policy stance. Macklem and his officials said that tighter credit conditions — made worse by instability in the banking sector — are expected to restrain growth in the US and Europe.
“The Bank of Canada’s motto is now ‘don’t just do something, sit there,’ and patience should indeed be a virtue in getting inflation back to its target without inflicting too much harm on the economy,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors. “Overall, still on hold, but not in synch with market expectations for outright rate cuts this year, since the bank isn’t calling for a recession.”
While the central bank acknowledged that output was much stronger than projected in the first quarter, policymakers see that momentum ending soon. Growth will be “weak” for the rest of 2023, implying that the economy will have excess supply in the second half. The Bank of Canada still sees inflation returning to near its target by the end of 2024 — but there are risks to that forecast.
“Getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behavior has yet to normalize,” the bank said. Policymakers will be “particularly focused” on these indicators, as well as core inflation.
A new batch of forecasts point to economic output coming in stronger than previously expected, with firmer consumption pushing yearly growth in gross domestic product to 1.4% from 1.0%. That’s largely due to a surprisingly robust 2.3% annualized expansion in the first quarter, from 0.5% projected in January’s monetary policy report.
Strong population gains from immigration mean that “the economy may be able to grow at a somewhat faster pace than previously expected without generating additional inflationary pressures,” the bank said.
Although the jobs market is still tight, the labor force is expanding quickly due the influx of newcomers, which more than offsets the drag from an aging population, the bank said. Strong population growth is also boosting consumption, especially in the near term, and lifting the potential growth rate, officials said.
Nevertheless, the bank expects consumer spending to be subdued beginning in the second half of the year and into 2024 as the effects of monetary tightening hit the economy harder. The share of income spent on interest payments will continue to rise as homeowners renew their mortgages at higher rates, officials said.
The bank didn’t change its estimate of the neutral rate of interest, which it estimates at 2% to 3%, the same as a year-ago assessment.
Just after the central bank’s March meeting, Silicon Valley Bank and Signature Bank collapsed in the US, which was soon followed by an emergency sale of Credit Suisse to UBS. The financial turmoil has stirred talk of global recession, changing expectations for how much further the Federal Reserve will lift rates.
The bank flagged a sharp global slowdown on deeper financial-sector stress as the biggest downside risk to its outlook, which would have significant domestic spillover.
“Rising unemployment could also interact with high household debt and housing vulnerabilities, amplifying the economic downturn in Canada,” officials said in the monetary policy report.
(Updates with fresh market reaction and economist quote.)
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