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Bank of Canada holds, acknowledges easing in “excess demand”

10:45 EDT

To sum up and close out today’s Bank of Canada action:

– Markets are mostly convinced the Bank’s tightening cycle is done, and are now mainly concerned with adjusting bets on when the first rate cut might occur. Odds on a cut by January are creeping higher, but the consensus is anchored closer to mid-2024.

– But policymakers cannot declare “mission accomplished” yet, and will need to maintain a rhetorically hawkish posture until the threat of an unwarranted easing in financial conditions has passed.

– Two inflation reports, two jobs prints, a business outlook survey, and a number of consumer spending reports will land before the next rate decision in late October. The Bank’s data-dependent posture implies that markets will move on many of these releases as rate expectations shift.

– Today’s decision has had a relatively minor impact on markets, with tomorrow’s Economic Progress Report more likely to deliver the fireworks foreign exchange traders crave.

10:37 EDT

Aligning with a fairly modest reaction in currency markets, Bloomberg’s implied policy rate tool is showing very little change in the expected rate trajectory after today’s decision:

10:26 EDT

Markets are convinced the Bank’s tightening cycle is done, and are now mainly concerned with adjusting bets on when the first rate cut might occur. Odds on a cut by January are creeping higher, although the consensus is anchored closer to mid-2024. 

But policymakers cannot declare “mission accomplished” yet, and will need to maintain a rhetorically hawkish posture until the threat of an unwarranted easing in financial conditions has passed. 

Two inflation reports, two jobs prints, a business outlook survey, and a number of consumer spending reports will land before the next rate decision in late October. The Bank’s data-dependent posture implies that markets will move on many of these releases as rate expectations shift. 

10:20 EDT

Context for today’s decision: The labour market is weakening, with employment falling in two of the past three reports, and vacancies are down about a quarter from last year’s highs. The unemployment rate is ticking steadily higher, with population growth exceeding job creation.

The economy unexpectedly contracted at a -0.2-percent annualised pace in the second quarter after expanding at 2.6 percent in the first three months of the year, and a preliminary estimate showed growth remaining flat in July as well.

A modest rebound is possible in the third quarter – a number of temporary distortions, including labour strikes, drought, and forest fires, played havoc with the headline print – and the Bank of Canada may consider some of the inventory and export adjustments transitory.

But the direction of travel for residential investment is clearly down. After an early-year dead-cat bounce, prices and activity levels are subsiding across the country, and developers are moving to the sidelines – this morning’s Toronto housing numbers showed clear signs of hitting a wall. And household consumption is poised to weaken as higher debt carrying costs eat into overall spending levels.

10:07 EDT

Bank of Canada policymakers are classy: no victory lap in this morning’s statement, no mention of “interest rate-sensitive” sectors bearing the brunt of the slowdown.

Statement language below: 

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is also continuing its policy of quantitative tightening.

Inflation in advanced economies has continued to come down, but with measures of core inflation still elevated, major central banks remain focused on restoring price stability. 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 July Monetary Policy Report (MPR).

The Canadian economy has entered a period of weaker growth, which 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. This reflected 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. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%.

Recent 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.

With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5% and continue to normalize the Bank’s balance sheet. However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.

https://www.bankofcanada.ca/2023/09/fad-press-release-2023-09-06/

10:05 EDT

As was almost-universally expected, the Bank of Canada maintained its benchmark overnight rate at 5 percent this morning, even as it retained a steadfastly-hawkish bias. Officials said “excess demand in the economy is easing,” and pointed to the “lagged effects of monetary policy” in supporting the decision to stay on hold for now. 

Policymakers acknowledged signs of underlying softness, noting that the “Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures”. Both transitory and structural changes are seen playing a role, with wildfires temporarily hitting activity even as consumption, housing, and credit growth slow on a more sustained basis. 

Price growth concerns remained front and centre, with pressures remaining “broad-based,“ and target measures exhibiting “little recent downward momentum in underlying inflation” – but officials think an easing will arrive after a short-lived gasoline-boosted jump in coming months. 

The Canadian dollar is almost unchanged as we go to print, with odds on an autumn rate increase holding stable relative to levels that held a few minutes ago. 

Markets will get more to chew on tomorrow, when Governor Tiff Macklem delivers the Bank’s latest Economic Progress Report in Calgary, providing more insight into the thinking behind today’s decision. We think he will stick to the “higher for longer” mantra, seeking to prevent early-2024 rate cut expectations from becoming too embedded. 

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