Bank of Canada maintained its overnight rate at 4.50% in March 2022, as expected. The move follows the aggressive hikes at the last five meetings. The BOC had raised eight consecutive rate times pushing borrowing costs to the highest level since 2008. This is the first meeting where the Bank of Canada held rates unchanged in 12 months. Notably they removed ” the economy remains in excess demand” from the statement. USD/CAD rose 57 pips on the decision, above the November high of 1.3808 as the gains extend. Forwards impacted the cross, US 2s climbing above 5% and Canadian 2s flat at 4.32%.
- The overnight rate remains 4.50% Prior overnight rate was 4.50%
- Global economic developments have evolved broadly in line with the outlook in the January Monetary Policy Report
- In the United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January.
- In Canada, economic growth came in flat in the fourth quarter of 2022, lower than the Bank projected. With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment
- Employment growth has been surprisingly strong
- With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease
- the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year.
- Last meeting BOC said they expects 1% growth in 2023, weighted towards the back half vs +0.9% prior. Sees 1.8% GDP growth in 2024 vs 2.0% prior
- Sees inflation this year at 3.6% vs 4.1% prior. Sees 2024 at 2.3% vs 2.2% prior
- UPDATED US to the Canadian dollar USD/CAD rose to a four-month high and rose 57 pips on the decision. Above the November high of 1.3808 as the gains extend.
- Rate divergence between US and Canada with US 2s climbing above 5% and Canadian 2s flat at 4.32%.
Bank of Canada’s Quarterly Monetary Policy Report (Dec 2022)
- 2022 GDP seen at 3.5% vs 3.3% prior
- 2023 GDP seen at 1.0% vs 0.9% prior
- 2024 GDP seen at 1.8% vs 2.0% prior
- 2022 CPI was 6.3% vs 6.9% expected
- 2023 CPI seen at 3.6% vs 4.1% prior
- 2024 CPI seen at 2.3% vs 2.2% prior
- Output gap in Q3 shrank to between 0.25% and 1.25% from 0.50% and 1.50% in Q2
- Slowdown in economic activity abroad, especially in the United States, is starting to weigh on exports thought recent CAD depreciation partially offsets this
- High energy costs seem to have passed through to inflation much more than usually, it will take time for these impacts to recede
- Global growth seen at 1.6% in 2023
- Bank views around inflation outlook as roughly balanced, but upside risk is of greater concern due to persistently high inflation
- Inflation seen returning to 2% target around end of 2024
- A couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth
Bank of Canada Full Rate Statement for March 2023
The Bank of Canada today held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.
Global economic developments have evolved broadly in line with the outlook in the January Monetary Policy Report (MPR). Global growth continues to slow, and inflation, while still too high, is coming down due primarily to lower energy prices. In the United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January. In particular, labour markets remain tight, and elevated core inflation is persisting. Growth in China is rebounding in the first quarter. Commodity prices have evolved roughly in line with the Bank’s expectations, but the strength of China’s recovery and the impact of Russia’s war in Ukraine remain key sources of upside risk. Financial conditions have tightened since January, and the US dollar has strengthened.
In Canada, economic growth came in flat in the fourth quarter of 2022, lower than the Bank projected. With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment. Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.
The labour market remains very tight. Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated. Wages continue to grow at 4% to 5%, while productivity has declined in recent quarters.
Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians. With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.
Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year. Year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3½%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.
At its January decision, the Governing Council indicated that it expected to hold the policy interest rate at its current level, conditional on economic developments evolving broadly in line with the MPR outlook. Based on its assessment of recent data, Governing Council decided to maintain the policy rate at 4½%. Quantitative tightening is complementing this restrictive stance. Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.
Source: Bank of Canada
From the TradersCommunity News Desk