Canadian Inflation Falls to 2.9% in January, Boosting Rate Cut Prospects

General Bob Rees 20 Feb

Canadian Inflation Falls to 2.9% in January, Boosting Rate Cut Prospects
The Consumer Price Index (CPI) rose 2.9% year-over-year in January, down sharply from December’s 3.4% reading. The most significant contributor to the deceleration was a 4% decline in y/y gasoline prices, compared to a 1.4% rise the month before (see chart below). Excluding gasoline, headline CPI slowed to 3.2% y/y, down from 3.5% in December.

Headline inflation of 2.9% marks the first time since June that inflation has moved into the Bank of Canada 1%-to-3% target band and only the second time to breach that band since March 2021.

Grocery price inflation also decelerated broadly in January to 3.4% y/y, down from 4.7% in December. Lower prices for airfares and travel tours also contributed to the headline deceleration. Prices for clothing and footwear were 1.3% lower than levels from a year ago, potentially reflecting the discounting of winter clothing after a milder-than-usual winter in much of the country.

The shelter component of inflation remains by far the largest contributor to annual inflation. The effect of past central bank rate hikes feeds into the CPI with a lag. The y/y growth in mortgage interest costs edged lower in January but still posted a 27.4% rise and accounted for about a quarter of the total annual inflation. Inflation, excluding mortgage costs, is now at 2.0%. Home rent prices continue to rise, but another component under shelter – homeowners’ replacement costs inched lower on slower house price growth.

On a monthly basis, the CPI was unchanged in January, following a 0.3% decline in December. On a seasonally adjusted monthly basis, the CPI fell 0.1% in January, the first decline since May 2020.
The Bank of Canada’s preferred core inflation measures, the trim and median core rates, exclude the more volatile price movements to assess the level of underlying inflation. The CPI trim slowed three ticks to 3.4%, and the median declined two ticks to 3.3% from year-ago levels, as shown in the chart below.

Notably, the share of the CPI basket of goods and services growing at more than 5% has declined from the peak of 68% in May 2022 to 28% in January 2024.
Bottom Line

The next meeting of the Bank of Canada Governing Council is on March 6. While January’s inflation report was better than expected and shows that the breadth of inflation is narrowing, it is still well above the level consistent with the 2% inflation target.

Shelter inflation will remain sticky as higher mortgage rates over the course of last year filter into the index and the acute housing shortage boosts rents.

The Bank of Canada will remain cautious in the face of still-high wage gains and core inflation measures above 3%. I hold to my view that the Bank will begin cutting rates in June.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

The Bank of Canada Holds Rates Steady And Expects Rate Cuts Later This Year

General Bob Rees 30 Jan

The Bank of Canada Holds Rates Steady And Expects Rate Cuts Later This Year
Today, The Bank of Canada held the overnight rate at 5% for the fourth consecutive meeting but provided an outlook suggesting that monetary easing will begin by mid-year. The Bank forecasts a soft landing for the Canadian economy, with inflation falling to 2.5% by the end of this year. While some economists predict a recession, the Bank suggests that “growth will likely remain close to zero through the first quarter of 2024” and “strengthen gradually around the middle of 2024.” This would be a soft landing.

While inflation ended 2023 at 3.4%, owing mainly to high and sticky shelter costs, “the Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.”

The press release says that the “Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”  The Bank now believes the economy is in excess supply, inflation expectations and corporate pricing behaviour are moving in the right direction, and wage demands, at 5.4% year-over-year in the last reading–are still too high. Wages are a lagging indicator and with job vacancies returning to pre-pandemic levels, wage pressures are likely to dissipate as the year progresses.
Today, the tone was much more optimistic, suggesting that policymakers are increasingly confident interest rates are restrictive enough to bring inflation back to the 2% target. Still, Bank officials want to see more progress on core inflation before it begins to ease. It said, “The Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.”

The central bank focuses on “the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour” and remains resolute in restoring price stability.

Bottom Line

This was a more upbeat Bank of Canada statement. There is a good chance that monetary tightening has done its job, and inflation will trend downward in the coming months. As we have seen, the road to 2% inflation is bumpy, but we are heading there probably sooner than the Bank expects. As predicted, they are staying the course for now, but multiple rate cuts are likely this year. The scheduled dates for announcing the policy rate are March 6, April 10, June 5 and July 24. The Bank of Canada will begin cutting the overnight rate somewhere in there.

For now, my bet is on the June meeting, but if I’m wrong, it will likely be sooner rather than later. Once they begin to take rates down, they will do so gradually, 25 basis points at a time, and over a series of meetings. We could well see rates fall by 100-to-150 bps this year. Risks to the outlook remain, as always.

I do not expect the overnight policy rate to fall as low as the pre-Covid level of 1.75% this cycle. Inflation averaged less than 2% in the five years before COVID-19, depressed by increasing globalization and technological advances. Those forces are now reversed.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Jobless Rates Hits 22-Month High–Led by Losses in Finance and Real Estate Employment

General Bob Rees 4 Dec

Jobless Rates Hits 22-Month High–Led by Losses in Finance and Real Estate Employment
Today’s StatsCanada Labour Force Survey for November was a mixed bag. Total employment gains were stronger than expected. However, the rising unemployment rate and drop in hours worked were signs of mounting economic weakness, especially in the financial and real estate sectors.

Employment in Canada rose by 24.9K in November 2023, following a 17.5K rise in October and above forecasts of 15K. Employment went up in manufacturing (+28K) and construction (+16K). On the other hand, there were declines in wholesale and retail trade (-27K) and finance, insurance, real estate, rental and leasing (-18K). November marks the fourth consecutive month of job gains. Still, the Bank of Canada noted in its October meeting that “recent job gains have been below labour force growth and job vacancies have continued to ease,” suggesting a slowdown in labour demand. The monthly employment gain averaged 39K so far this year, while monthly population growth has averaged 80.8K.

Rapid population growth–driven by Canada’s open-door policy–has boosted economic activity. Despite dramatic tightening by the Bank of Canada, labour markets remain resilient. While yesterday’s GDP release showed a 1.1% decline in growth in the third quarter, housing, government spending and private consumption added to growth. More recent data for Q4 suggest a pick-up in overall activity. Today’s employment data shows stronger-than-expected jobs gains in November.

In other data released last week, Canadian retail sales also surprised on the high side. Consumers splurged in September and October, a surprise resurgence in spending even as high interest rates restrict household budgets. Retail receipts rose 0.8% in October. That’s the biggest jump since April and followed an unexpected 0.6% increase in September, which far exceeded the median estimate of a flat reading in a Bloomberg survey of economists.
The unemployment rate increased for the second consecutive month, continuing its upward trend since April. The unemployment rate rose 0.1 percentage points to 5.8% in November, bringing the cumulative increase since April 2023 to 0.8 percentage points. Compared with a year earlier, unemployed people in November were more likely to have been laid off from their previous job, reflecting more difficult economic and labour market conditions in 2023 compared with 2022.
In construction, employment increased by 16K (+1.0%) in November, building on an increase of 23K (+1.5%) in October. While employment declined in construction through the spring and summer of 2023, gains in October and November brought employment levels to within 15,000 of the peak reached in January 2023. According to the most recent data on building construction, investment in building construction, mainly residential building construction, trended down for most of 2023 before partially rebounding in August and September.

Employment declined by 27K (-0.9%) in wholesale and retail trade in November, adding to a drop of 22K (-0.7%) in October. As of November, employment in the industry was at its lowest since December 2022.

Employment in finance, insurance, real estate, rental and leasing fell by 18K (-1.3%) in November. Since July, employment in this industry has declined by 63K (-4.4%), the steepest decrease of any sector over the period.

Wage growth was steady at +4.8% y/y, still well above what the Bank of Canada targets, given the productivity decline.

On the soft side, hours worked fell 0.7% despite a significant rise in full-time employment. That’s the largest monthly drop since early 2022 and doesn’t bode well for GDP growth in the month after the surprise strength in October’s flash estimate released yesterday.
Bottom Line

Last week, Governor Tiff Macklem said interest rates may be restrictive enough to restore price stability. He added that more downward pressure on inflation is in the pipeline, with the economy expected to remain weak for the next few quarters.

All the relevant data are in now for the Bank of Canada decision next Wednesday, December 6th. The Bank should maintain its pause and suggest that monetary easing may commence in the coming months depending on a continued decline in inflation. Right now, markets are forecasting the first rate cut in April 2024. That would certainly make for a robust spring housing market. I expect a 200 basis point drop in the overnight rate by the end of 2024 to 3.0%. This would imply a commensurate decline in VRMs. Fixed mortgage rates have already begun to drop owing to the sharp decline in mid-term bond yields. An acceleration in the drop in fixed mortgage rates is likely next year, as the spread between FMRs and market yields is still historically high.
 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Weak October Jobs Report Likely Takes Further BoC Rate Hikes Off The Table

General Bob Rees 3 Nov

Weak October Jobs Report Likely Takes Further BoC Rate Hikes Off The Table
Today’s StatsCanada Labour Force Survey for October was weak across the board. Total job gains were meagre, full-time jobs fell, hours worked were flat, wage inflation eased (a bit), and the unemployment rate rose.

Employment changed little in October, up only 17,500 (0.1%), after rising 64,000 in September and 40,000 in August. The employment rate—the proportion of the working-age population with a job—fell 0.1 percentage points to 61.9% in October, as the population aged 15 and older increased by 85,000 (+0.3%).
Most notably, the unemployment rate rose 0.2 percentage points to 5.7%–its fourth monthly increase in six months and its highest level in 21 months, adding evidence to a weakening economy. The latest monthly GDP figures released earlier this week point to a flat to negative growth rate for the third quarter this year. Final data will be released later this month, but today’s numbers suggest that the overnight policy rate at 5.0% has peaked. The pace of employment gains is running below labour force growth from record population increases. It indicates that labour demand is cooling while supply is catching up quickly. The Bank of Canada expects the economy to move into modest excess supply in the fourth quarter, helping to reduce consumer price inflation.

As unemployment has increased and job vacancies have decreased in recent months, the labour force participation rate—the proportion of the population aged 15 and older that was either employed or looking for work—has remained relatively high. The participation rate in October (65.6%) was unchanged from the previous month and up 0.2 percentage points on a year-over-year basis.
The most significant job gains were in construction, rising by 23,000, more than offsetting a decline of 18,000 in September. The most economically sensitive sectors posted job losses. These included manufacturing, wholesale and retail trade, finance, insurance, real estate, and rental and leasing, as well as accommodation and food services.

Wage inflation continues to be troubling for the central bank. On a year-over-year basis, average hourly wages rose 4.8% in October, following an increase of 5.0% in September.
Bottom Line

The Bank of Canada meets once again on December 6th. Before then, we will see another CPI inflation report on November 21, Q3 GDP on November 30 and the November Labour Force Survey on December 1. Given the Bank’s general reluctance to hike rates just before the holiday season, the Bank of Canada will remain on the sidelines.

Judging by today’s weaker-than-expected employment report in the US as well, the Fed will also hold their pause for the remainder of this year.

Rate relief, however, is still many months away. The central banks will want to see inflation at 2% with the belief that it will remain there before they begin to cut interest rates. That will happen, but probably not before next summer. According to Bloomberg News, “Traders in overnight swaps brought forward their expectations for when the Bank of Canada will start loosening policy, and are now betting policymakers will cut interest rates by 25 basis points in July, from September a day ago.”
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Bank of Canada holds its interest rate steady, publishes updated economic forecasts

General Bob Rees 25 Oct

Thank you to one of our preferred partners, First National, for their summary!

Bank of Canada holds its interest rate steady, publishes updated economic forecasts

Today, the Bank of Canada announced that it would maintain its overnight policy interest rate at 5.00%, stating that there is “growing evidence” that past interest rate increases are dampening economic activity and relieving price pressures.

This decision provides some comfort to borrowers who have seen their mortgage costs rise steadily since March of 2022. As for real relief – in the form of rate cuts – the Bank demurred, noting that its preferred measures of core inflation show “little downward momentum.” Consequently, the Bank said it is holding this policy rate and continuing its current policy of quantitative tightening.

We capture the Bank’s observations and its latest economic forecasts in the summary below.

Inflation facts and outlook

  • In Canada, inflation measured by the Consumer Price Index (“CPI”) has been volatile in recent months: 2.8% in June, 4.0% in August, and 3.8% in September
  • Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services
  • Food inflation is easing from very high rates; however, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high
  • Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%
  • The Bank’s preferred measures of core inflation show little downward momentum

Canadian housing and economic performance

  • There is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures
  • Consumption has been subdued, with softer demand for housing, durable goods and many services
  • Weaker demand and higher borrowing costs are weighing on business investment
  • A surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption
  • In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease; however, the labour market remains “on the tight side” and wage pressures persist
  • Overall, a range of indicators suggest that supply and demand in the economy are now “approaching balance”

Global economic performance and outlook

  • The global economy is slowing and growth is forecast to moderate further as past increases in policy interest rates and the recent surge in global bond yields weigh on demand
  • The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this outlook is little changed from the Bank’s July Monetary Policy Report, the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected
  • Growth in the Euro area has “slowed further”
  • Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand relieves price pressures but underlying inflation is persisting, meaning central banks must “continue to be vigilant”
  • Oil prices are higher than the BoC assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty

Summary and Outlook

The BoC noted that after averaging 1% over the past year, economic growth is expected to remain “weak” for the next year before increasing in late 2024 and through 2025. Near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent economic “pickup” will be driven by household spending as well as stronger exports and business investment in response to improving foreign demand. Spending by governments contributes materially to growth over the forecast horizon. Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025.

In the Bank’s October projection, CPI inflation is expected to average about 3.5% through the middle of next year before gradually easing to 2% in 2025. Inflation is expected to return to the Bank’s target about the same time as policymakers forecast in their July 2023 projection, “but the near-term path is higher because of energy prices and ongoing persistence in core inflation.”

As for what to expect going forward, the Bank had this to say about interest rates: “With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. However, Governing 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.”

The message is therefore clear: the Bank wants to see downward momentum in core inflation before it changes tack, and continues to be focused on the “balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.”

Once again, the Bank ended its communique with a familiar phrase: it remains “resolute in its commitment to restoring price stability for Canadians.”

What’s next?

The Bank’s final (scheduled) interest rate announcement of 2023 takes place December 6th and we will follow immediately after with our next executive summary.

Good News On the Inflation Front Suggests Policy Rates Have Peaked

General Bob Rees 17 Oct

Good News On the Inflation Front Suggests Policy Rates Have Peaked
Today’s inflation report for September was considerably better than expected, ending the three-month rise in inflation. Not only did the headline inflation rate fall, but so did the core measures of inflation on a year-over-year basis and a three-month moving average basis. This, in combination with the weak Business Outlook Survey released yesterday, suggests that the overnight policy rate at 5% may be the peak in rates. While I do not expect the Bank to begin cutting rates until the middle of next year, the worst of the tightening cycle may well be over.

Offsetting the deceleration in the all-items CPI was a year-over-year increase in gasoline prices, which rose faster in September (+7.5%) compared with August (+0.8%) due to a base-year effect. Excluding gasoline, the CPI rose 3.7% in September, following a 4.1% increase in August. Looking ahead to the October inflation report, the base effect for headline CPI is favourable, as CPI surged in October 2022. Gasoline prices are down about 7% so far this month. Given the war in the Middle East, however, there is no guarantee that this will hold, but if it does, the October headline CPI could move into the low-3% range.

On a monthly basis, the CPI fell 0.1% in September after a 0.4% gain in August. The monthly slowdown was mainly driven by lower month-over-month prices for gasoline (-1.3%) in September. Goods inflation fell 0.3% from a month earlier, the first time since December 2022, and grew 3.6% from a year ago versus 3.7% in August. Services inflation was unchanged from August, the first time it hasn’t grown on a monthly basis since November 2021, while the rate slowed to 3.9% on a yearly basis, from 4.3% in August.
Yesterday’s Survey of Consumer Expectations showed that perceptions of current inflation remain well above actual inflation.  One reason is the very visible level of grocery and gasoline prices. As the chart below shows, food inflation–though still elevated–decelerated to 5.9% last month, and CPI excluding food and energy fell to a cycle-low 2.8%. Large monthly gains in September 2022, when grocery prices increased at the fastest pace in 41 years, fell out of the 12-month movements and put downward pressure on the indexes.
Prices for durable goods rose at a slower pace year over year in September (+0.4%) compared with August (+1.4%). The purchase of new passenger vehicles index contributed the most to the slowdown, rising 1.7% year over year in September, following a 3.1% gain in August. The deceleration in the price of new passenger vehicles was partly attributable to improved inventory levels compared with a year ago.

Additionally, furniture prices (-4.6%) and household appliances (-2.3%) continued to decline year-over-year in September, contributing to the slowdown in durable goods. Consumers paid less on a year-over-year basis for air transportation (-21.1 %) in September, coinciding with a gradual increase in airline flights over the previous 12 months.

Other measures of core inflation followed by the Bank of Canada also decelerated.

Bottom Line

According to Bloomberg News calculations, “A three-month moving average of underlying price pressures that Governor Tiff Macklem has flagged as key to policymakers’ thinking fell to an annualized pace of 3.67%, from 4.29% a month earlier.”  While this is still well above the Bank’s 2% target, the global economy is slowing, the Canadian and US economies are slowing, and with any luck at all, the Bank of Canada might see inflation move to within its target range next year. However, the central bank will be cautious, refraining from rate cuts until the middle of next year. The full impact of rate hikes has yet to be felt. The next move by the Bank of Canada could be a rate cut, but not until next year.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Residential Mortgage Commentary – Positive housing market sentiment

General Bob Rees 3 Oct

Thank you to our partners at First National for the below stats and positive info.  Enjoy!

 

 

Residential Mortgage Commentary – Positive housing market sentiment

  • Oct 2, 2023
  • First National Financial LP

An interesting new survey suggests a growing number of Canadians may be getting ready to move back into the housing market.

The newly launched survey by Dye and Durham indicates one in ten are looking to sell their primary residence and move into a new one within the next 12 months; double the number who made the move in the past year.

The number of respondents planning to expand their holdings is also up significantly with 8.0% saying they intend to buy an investment property or vacation home in the next year.  That is nearly double the 5.0% who did so in the past year.  First-time buying decisions are also getting stronger.  Eight percent of respondents expect to jump into the market, up from 4.0% who actually made a purchase in the last 12 months.

The sidelines of the housing market will still be crowded though.  The survey suggests 23% of Canadians will bide their time until interest rates come down.  Nearly a quarter (24%) say they are waiting for prices to ease.

A separate survey of people who have bought a home in the last 4 years (by a popular real estate marketplace) shows that the buying decisions of 93% of respondents were influenced by rising interest rates and competitive markets.  At the same time 43% said they wanted to buy before prices increased further.

Nearly a third (30%) of the respondents say their finances are tight right now, with 10% saying they are unable to meet basic needs.  Still, they do not regret their purchase with 45% saying they will still be happy even if there is another interest rate increase this year.

 

Bank of Canada leaves its benchmark interest rate at 5.0%

General Bob Rees 6 Sep

Bank of Canada leaves its benchmark interest rate at 5.0%

Under the heading no news is good news, the Bank of Canada decided today to keep its benchmark (overnight) interest rate steady at 5.00%, putting at least a temporary hold on a policy that resulted in 10 increases stretching back to March 2022.

At the Bank’s last meeting in July, it raised the rate 0.25% due to what it said was evidence of more persistent excess demand and elevated core inflation.

Today’s announcement from the Bank struck a similar tone but with a different outcome. We highlight its latest observations below:

Canadian housing and economic performance

  • Canada’s economy has entered a period of weaker growth, which the Bank says “is needed to relieve price pressures”
  • Economic growth slowed sharply in the second quarter of 2023, with output contracting by 0.2% at an annualized rate, reflecting “a marked weakening” in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country
  • Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers
  • Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment
  • “Tightness” in the labour market has continued to ease gradually, but wage growth has remained around 4% to 5%

Inflation facts and outlook

  • Recent Consumer Price (CPI) data indicate that inflationary pressures remain broad based
  • After easing to 2.8% in June, CPI inflation moved up to 3.3% in July, averaging close to 3% in line with the Bank’s projection
  • With the recent increase in gasoline prices, CPI inflation is expected to be “higher in the near term” before easing again
  • Year-over-year and three-month measures of core inflation are now both running at about 3.5%, indicating there has been little recent downward momentum in underlying inflation
  • The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability

Global economic indicators

  • Global growth slowed in the second quarter of 2023, largely reflecting a significant deceleration in China
  • With ongoing weakness in the property sector undermining confidence, growth prospects in China have diminished
  • In the United States, growth was stronger than expected, led by robust consumer spending
  • In Europe, strength in the service sector supported growth, offsetting an ongoing contraction in manufacturing
  • Global bond yields have risen, reflecting higher real interest rates, and international oil prices are higher than was assumed in the Bank’s July Monetary Policy Report (MPR).

Summary and outlook

In summarizing today’s decision, the Bank said “with recent evidence that excess demand in the economy is easing,” and given the lagged effects of monetary policy, Governing Council decided to hold its policy interest rate at 5% and continue to normalize the Bank’s balance sheet.

However, the Bank also noted that it remains concerned about the “persistence of underlying inflationary pressures,” and is prepared to “increase the policy interest rate further if needed.”

Governing Council noted it will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, it noted it will evaluate whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the Bank’s 2% inflation target.

Once again, the Bank repeated its mantra of remaining “resolute in its commitment to restoring price stability for Canadians.“

Stay tuned

The Bank’s next scheduled policy announcement – the second last of 2023 – is set for October 25th. We will follow that decision closely with an executive summary the same day.

In the meantime, First National remains ready, willing and more than able to provide financing options that meet your needs. Please contact us if we can help you in any way.

Interest Rates Will Stay Higher For Longer

General Bob Rees 13 Jul

The Bank of Canada hiked the overnight rate for the tenth time today to a 22-year high of 5%. They also postponed their forecast of when inflation will hit the 2% target by six months to mid-2025. This means interest rates will stay higher for longer.
Interest Rates Will Stay Higher For Longer
The Bank of Canada increased the overnight policy rate by 25 basis points this morning to 5.0%, its highest level since March 2001. Never before has a policy action been so widely expected. Still, the Bank’s detailed outlook in the July Monetary Policy Report (MPR) suggests stronger growth and a longer trajectory to reach the 2% inflation target. The Bank of Canada believes the economy is still in excess demand and that growth will continue stronger than expected, supported by tight labour markets, the high level of accumulated household savings, and rapid population growth. “Newcomers to Canada are entering the labour force, easing the labour shortage. But at the same time, they add to consumer spending and demand for housing.”

The Bank forecasts GDP growth to average 1.0% through the middle of next year–a soft landing in the economy. “This means the economy moves into modest excess supply in early 2024, and this should relieve price pressures. CPI inflation is forecast to remain about 3% for the next year, before declining gradually to the 2% target in the middle of 2025.” This is about six months later than the Bank expected in April. This means that high-interest rates remain higher for longer.

While Canadian inflation has fallen quickly, much of the downward momentum has come from lower energy prices and base-year effects as large price increases last year fall out of the year-over-year inflation calculation. We are still seeing large price increases in a wide range of goods and services. Our measures of core inflation—which we use to gauge underlying inflationary pressures—have come down, but not as much as we expected.
There continue to be large price increases in a wide range of goods and services. Measures of core inflation have come down, but by less than expected (see chart below). One measure of core inflation–which removes food, energy and shelter prices, remains elevated and will likely continue to be sticky.

To remove base effects, the Bank looks at three-month rates of core inflation, which have remained at 3.5% to 4.0% since September 2022, almost a percentage point above the Bank’s expectations at the beginning of this year.

In addition, labour markets remain tight. Although the jobless rate has risen to 5.4%, that is still low by historical standards. The unemployment rate was at 5.7% when the pandemic began, which was considered close to full employment at the time. Job gains have been robust, with about 290,000 net new jobs created in the first six months of 2023. Many new entrants to the labour market have been hired quickly, and wage growth has been about 4% to 5%.
The faster-than-expected pickup in housing resales, combined with a lack of supply, has pushed house prices higher than anticipated by the Bank of Canada in January (see chart below). According to the MPR, “the previously unforeseen strength in house prices is likely to persist and boost inflation by as much as 0.3 percentage points by the end of 2023, compared with the January outlook.”
Bottom Line

As always, the next steps by the Bank of Canada will be data-dependent. Interest rates will remain higher for longer if the Bank is correct that inflation will not reach its 2% target until 2025. We also cannot rule out more rate hikes in the future. This morning, the US inflation data for June were released, showing a marked decline from 4% in May to 3% in June. Markets rallied worldwide, taking Canadian bond yields down despite the BoC tightening. The hardship caused by the continued rise in mortgage rates is already evident. OSFI recently announced the possibility of higher capital requirements for federally insured financial institutions on mortgages with loan-to-value ratios above 65% that have unusually high amortizations. This proposal is now out for consultation. It seems OSFI and the federal consumer watchdog are working at cross purposes.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Economic growth leads the Bank of Canada to increase its benchmark interest rate

General Bob Rees 7 Jun

*** Thank you to our partners at First National for the below analysis.  Bank of Canada increases Prime by .25% today.***

 

Economic growth leads the Bank of Canada to increase its benchmark interest rate

  • Jun 7, 2023
  • First National Financial LP

Today, the Bank of Canada increased its overnight interest rate to 4.75% (+0.25% from April) because of higher-than-expected growth in Canada’s economy in the first quarter and the view that monetary policy was not yet restrictive enough to bring inflation down to target.

Leading up to today’s announcement, many economists feared that the BoC would have no choice but to raise rates in the face of persistent inflation and recent GDP growth. Their fears were founded.

To understand the Bank’s thinking on this important topic, we highlight its latest observations below:

Inflation facts and outlook

  • In Canada, Consumer Price Index (CPI) inflation “ticked up in April” to 4.4%, the first increase in 10 months, with prices for a broad range of goods and services coming in higher than expected
  • Goods price inflation increased, despite lower energy costs
  • Services price inflation remained elevated, reflecting strong demand and a tight labour market
  • The Bank continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices “feed through” and last year’s large price gains “fall out” of the yearly data
  • However, with three-month measures of core inflation running in the 3.50%-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target

Canadian housing and economic performance

  • Canada’s economy was stronger than expected, with GDP growth of 3.1% in Q1 2023
  • Consumption growth was “surprisingly strong and broad-based,” even after accounting for the boost from population gains
  • Demand for services continued to rebound
  • Spending on “interest-sensitive goods” increased and, more recently, “housing market activity has picked up”
  • The labour market remains tight: higher immigration and participation rates are expanding the supply of workers but new workers have been quickly hired, reflecting continued strong demand for labour
  • Overall, excess demand in the economy looks to be “more persistent” than anticipated

Global economic performance and outlook

  • Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high
  • While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability
  • In the United States, the economy is slowing, although consumer spending remains surprisingly resilient and the labour market is still tight
  • Economic growth has essentially stalled in Europe but upward pressure on core prices is persisting
  • Growth in China is expected to slow after surging in the first quarter
  • Financial conditions have tightened back to those seen before the bank failures in the United States and Switzerland

Summary and Outlook

The BoC said that based on the “accumulation of evidence,” its Governing Council decided to increase its policy interest rate, “reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”

The Bank says quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet.

Going forward, the Bank said it will continue to assess the dynamics of core inflation and the outlook for CPI inflation with particular focus on “ evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving” its inflation target.

Once again, the Bank repeated its mantra that it “remains resolute in its commitment to restoring price stability for Canadians.”

Next up

With today’s announcement now behind us, a new round of speculation will begin in advance of the Bank’s next policy announcement on July 12th. We will keep a close watch on the market in the meantime and report on the Bank’s next move that day.

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