Bank of Canada Drops Threats of Hikes, Shifts Discussion To Cuts

Canada’s central bank held rates as widely expected, but still surprised. Bank of Canada (BoC) announced they’ll continue to hold the overnight rate at 5.0%, along with continued quantitative tightening (QT). It was believed the central bank would be hawkish, hoping to avoid a repeat of last year that sent inflation (and rates) even higher. That wasn’t the case, as the BoC Governor dropped threats of rate hikes, and revealed the council is now focused on when to cut rates. 

Higher Rates Are Cooling Inflation, But It’s Still Too Damn High

The central bank boasted of progress on inflation, but warned it hasn’t cooled enough. Headline CPI climbed to 3.4% in December, accelerating from a month before. The BoC-preferred CPI Core, which excludes volatile components, also climbed to 3.7% over the same period. Both numbers remain much higher than the target rate of 2% the central bank considers stable. 

“While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behavior- continues to normalize, core measures of inflation are not showing sustained declines,” said BoC Governor Tiff Macklem.  

BoC Sees Inflation Back To Target 3 Years After Initially Expected

Higher rates are working but how long will it take to get back to target? The BoC anticipates CPI will fall to 3% annual growth by mid-year, but won’t hit its 2% target until 2025. That’s about 3 years past its initial forecast, but this time they’re probably right. 

“… inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work,” warned Macklem. 

Bank of Canada Drops Discussion of Hikes, Shifts To Cuts

No change to rates was widely anticipated but the BoC shifting its narrative wasn’t. Notably absent from the Governor’s speech was the mention of raising rates if needed. Instead, they said the BoC’s leadership is now discussing the exact opposite. 

“…with overall demand in the economy no longer running ahead of supply, the Governing Council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level.” 

Virtually no institution is forecasting higher interest rates, but discussing cuts is unexpected. This time last year, the Governor made a similar mistake by overtly communicating that rate hikes were over. It sparked a buying spree that ultimately forced the central bank to hike rates twice more.

By repeating the same message, the Governor is demonstrating he doesn’t see a repeat. That means he likely sees the economy as much weaker than it was this time last year. Something other analysts have called, but a position the BoC hasn’t officially adopted yet.

4 Comments

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  • Oldguy 2 months ago

    Here we go again.

  • Andrew Baldwin 2 months ago

    During the press conference today, Governor Macklem replied to a question from Kevin Carmichael by saying, in part: “when inflation did surged we raised rates very rapidly.” This is historical fiction, if not fantasy. The CPI inflation rate first exceeded 2% following the pandemic recession in March 2021, when it went from 1.1% in February to 2.2%. It rose to 3.4% the very next month in April, exceeding the 3% upper bound, and still the Governing Council did nothing. It finally raised the overnight rate in March 2022, when it hit 6.7%, which wasn’t, as it turned out, too far off the peak inflation rate of 8.1% for this business cycle, which came just a few months later in June 2022. The Bank of Canada was clearly following an inflation overshooting at the effective lower bound monetary policy, like the US Fed. When it finally responded to inflation it did so with far greater vigour than it would have had to if it had started raising rates earlier. Governor Macklem should admit that what the central bank did was wrong and tell Canadians that it won’t happen the next time the Bank of Canada finds itself at the effective lower bound.

  • Rate Maniac 2 months ago

    It is about time!! Get those rates back down to zero

  • BcGuy 2 months ago

    3.4% inflation eh?
    PC brand sparkling water at superstore just jumped 17%.
    Rents are up.
    Gas is going to jump soon.
    I call bullcrap on their manipulative inflation calculator.

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