After October easing in headline and core inflation, is central bank maintaining hawkish hold?
In a widely anticipated move, the Bank of Canada has decided to end its 2023 rate decision cycle by keeping its target policy rate steady.
In deciding to hold its target rate at 5% for a third straight session, the BoC had to weigh conflicting economic signals on inflation, economic growth, and employment, among others.
Today’s decision came several weeks after Statistics Canada revealed headline CPI cooling modestly to 3.1% on a year-on-year basis. That represents significant progress in the war against record inflation, but a look at the central bank’s preferred measures of core inflation suggests there’s still more work to be done.
“The global economy continues to slow and inflation has eased further. In the United States, growth has been stronger than expected, led by robust consumer spending, but is likely to weaken in the months ahead as past policy rate increases work their way through the economy,” the central bank said in announcing today’s decision. “Growth in the euro area has weakened and, combined with lower energy prices, this has reduced inflationary pressures.”
Last Friday, StatCan revealed Canada’s unemployment rate hit 5.8% in November, a mild uptick from 5.7% the previous month and significantly up from its near-record low of 5% at the start of the year.
That came on the heels of another report showing the economy shrinking in the third quarter, with real GDP contracting 1.1% on an annualized basis – sharply lower than the 0.1% the federal statistical agency had been projecting in earlier estimates.
“Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost,” the BoC said.
“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. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand”
Despite the hints of a broad slowdown in the data, along with surveys pointing to worsening financial challenges for consumers and businesses alike, the Canadian economy has still managed to escape recession on a broad basis.
That, coupled with CPI measures still well above the 2% target rate preferred by policymakers, has given Governor Tiff Macklem and others at the BoC the ammunition they need to maintain a hawkish hold.
“[S]helter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs. In recent months, 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 BoC said.
“Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. 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.”