Yesterday’s decision by the Bank of Canada’s Governing Council is a clear sign that its high-interest rate rise policy could be reversed later this year, as on the previous two occasions rates were raised by 0.50%, after calling a 0.75% rise last September and a 1% upsurge in July. Yesterday, the Bank raised its interest rate by only 0.25%.
It was also revealed that the Bank Rate, which sets the interest that is paid to commercial banks, is now 4.75%, with the deposit rate at 4.50%.
In a statement, the Bank said that there is growing evidence that the restrictive monetary policy in place is slowing economic activity and reducing spending.
Consumption growth has declined from the first half of last year, and the housing market has regressed by a substantial margin.
The totality of the evidence appears to have convinced the Bank to apply the brakes to the speed of rising rates. This is despite the fact that that overall, Canada’s economic growth has fared better than has been expected, with the economy remaining in a state of excess demand. However, the labor market remains tight with unemployment levels at historic lows, and firms are having difficulty finding workers.
The Bank estimated that the economy in Canada grew by 3.6% for the whole of last year but will stall for the first half of this year before picking up again towards the end of 2023. GDP growth is forecasted to be 1% for this year and 2% for 2024.
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ING Predicts Rate Cuts in 2023
ING has forecasted that rate cuts could now be on the agenda for this year, having predicted a slower rate rise of 0.25%. A pause in increasing rates may be caused by the slowdown in the economy, and because inflation is starting to fall.
ING also expects that the Canadian economy will continue to soften as monetary conditions have tightened.
Annualized Inflation Falls Again
Inflation in Canada over a 12-month period has continued to drop since its June 2022 peak at 8.1%.
In December 2022 the rate fell to 6.3%, a significant fall of 0.5% from November’s CPI data.
Annualized inflation is now the lowest it has been since February 2022.
Lower gasoline prices and more moderate costs of consumer goods have been the driving forces for expenses to fall, easing the pressure on Canadian consumers.
However, the cost of food and shelter is still proving to be punitive, and short-term inflation expectations remain high.
Core inflation - prices that do not include food or energy - has remained high at a year-on-year 5%, but there was better news over the past three months as core inflation has fallen over this latter period.
Inflation is expected to come down significantly to 3% by the middle of 2023 before finally meeting the government’s target of 2% at some point in 2024.
The Bank also revealed that it is continuing its asset-selling quantitative tightening policy, in the hope that it will further reduce the money supply in an additional defense against higher inflation.
Global Prices High, but Prices to Drop
On a global scale, the Bank said that inflation has stayed high, yet prices are beginning to fall in many countries, mostly reflecting lower energy costs.
China’s abrupt lifting of Covid-19 restrictions has resulted in an upward revision in its growth, which may pose a risk of higher commodity prices.
Global economic growth is anticipated to fall to 2% in 2023, from 3.5% in 2022.
Stock Market Hits Back After Rate Revealed, Opposite for Canadian Dollar
The S&P/TSX index opened lower ahead of the Bank of Canada’s announcement, and the slower rate increase of rates sparked a recovery, but the index was still down by 0.52% over an hour after the Bank’s statement.
The Canadian Dollar depreciated against both the US Dollar and the UK Pound. Following the announcement, the USD/CAD currency pair traded as high as $1.3428.
The Bank’s minor dovish tilt may create more persistent weakness in the Canadian Dollar over the near term.