2024-01-24 14:50:25
The Bank of Canada leaves its key rate unchanged at 5%, a decision which confirms for the first time that the increases are over and which opens the door to a rate cut.
The reference to a further rate increase, if necessary, present in the Bank of Canada’s message since 2022, had disappeared from the Bank of Canada’s message on Wednesday, which is an important change in tone.
“As aggregate demand no longer exceeds supply, the Governing Council’s monetary policy discussions are refocusing: the question is no longer so much whether the policy rate is restrictive enough to restore price stability, but rather how much time it will be necessary to maintain it at the current level,” said Governor Tiff Macklem in his message.
On the other hand, those who wait impatiently should not rejoice too quickly. “Now is not the time to change course,” the governor insisted.
At a press conference, Tiff Macklem said it was “premature” to start thinking about rate cuts. “Canadians want prices to go down and rates to go down. U.S. too. But we need to see more progress [sur le front de l’inflation] before discussing this possibility.
“We must give the higher rates time to have their effects,” said the governor, who does not completely rule out the possibility of raising the key rate if inflation starts to rise again.
At 3.4%, inflation remains too high, according to the Bank of Canada, which emphasizes that the lack of housing is an obstacle to the decline in inflation. Housing and food prices are still rising too quickly. Inflation expectations and wage growth also hurt. The return to the 2% target will be slow, she predicts.
April or June?
Despite all the caveats put by the governor, most economists maintain their forecasts of a reduction in the key rate in the first half of the year, in April or June.
The rapid deterioration of the Canadian economy could force the central bank to lower its rate sooner rather than later, estimates Jocelyn Paquet, economist at the National Bank. It will not wait until inflation has returned to the 2% target before starting the downward movement.
In the report on monetary policy that accompanies its decision on rates, the Bank of Canada maintains its forecasts on the evolution of the Canadian economy. Growth will be weak until mid-year and should then accelerate to reach 2.5% in 2025, she forecasts. If the economy develops as predicted, the central bank’s governing council will now discuss “how long we will keep the policy rate at 5%,” the governor said.
The forecasts in the Monetary Policy Report, published at the same time as the rate decision, are considered too optimistic by many economists. “Mortgage renewals which continue to be carried out at higher interest rates, the slowdown in population growth and the repayment of CEBA loans [Compte d’urgence pour les entreprises canadiennes] will further darken an already bleak outlook,” estimates Randall Bartlett, senior director, Canadian economy, at Desjardins.
A difficult phase
The Bank of Canada does not want to talk about a recession or a soft landing for the Canadian economy. “We are in a difficult phase of the economic cycle,” said the governor.
At Desjardins, as at the National Bank, we believe that Canada cannot escape a recession, as the Bank of Canada seems to believe. “If the central bank wants to bring overall inflation back to the 2% target, this cannot be done without recession, due to the increase in the cost of housing, which is not part of monetary policy,” believes Jocelyn Pack.
He notes that the bank itself predicts that 50% of inflation over the next two years will be attributable to housing (28% of the Consumer Price Index basket).
Rising interest rates increase the cost of housing, but it is above all the shortage of housing that increases prices, “a problem that is a political problem,” he explains.
There is no question for the central bank of advancing towards an inflation level from which rate cuts would be possible. In response to questions from reporters, the governor acknowledged that high interest rates were fueling inflation in the housing sector. He reiterated that monetary policy applies to the entire economy, not just the housing sector, and that the prices of many goods and services are still too high.
The inflation rate will remain around 3% for the first half of the year, according to the bank, and will decline to 2.5% at the end of 2024. The return to the 2% target is planned for 2025.
There is still a lot of risk that inflation will start to rise again. An increase in government spending to support the economy is one of those risks, the governor said. Likewise, obstacles to the transport of goods through the Suez Canal and the Panama Canal could increase the price of certain products. There are also risks of rising oil prices if the war between Israel and Hamas continues.
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