Pause and wait
Bank of Canada stays on the sidelines
By Mark Parsons, ATB Economics 6 December 2023 2 min read
With the national economy and labour market both cooling, the Bank of Canada announced this morning that it is keeping its trendsetting policy interest rate at 5.0%. The decision to hold was widely expected.
This was the third announcement in a row without a change to the benchmark rate.
Today’s statement still refers to the possibility of rate hikes (the “prepared to raise the policy rate” warning stayed in), but included stronger language that inflation pressures are easing.
In particular, the Bank dropped the line from the last statement that “inflation risks have increased.” The Bank now says the economy is “no longer in excess demand” compared to “approaching balance” in its last statement. It also noted that the slowdown “is reducing inflationary pressures” compared to the softer “there is growing evidence” line in the October statement. The Bank also noted the slowdown is occuring in “a broadening range of goods and services prices.”
Today’s statement noted that oil prices are about $10 per barrel lower than assumed in October. This is noteworthy, as the October Monetary Policy Report indicated that “about half” the increase in the Bank’s upward revision to the CPI inflation forecast through to the end of 2024 was due to higher oil price assumptions.
With today’s announcement, the focus is more clearly shifting to when we can expect the Bank to begin decreasing rates.
Even though progress has been made, the Bank made clear that they want to see more evidence of core inflation coming down. The Bank will not be in a hurry, and definitely does not want to raise the policy rate again after lowering it. Our current view is that cuts will not come until around the midpoint of next year. This will give the Bank time to assess if inflation is truly under control and heading more definitely to the 2% target.
There was no press conference today, but we’ll be watching for any further hints tomorrow when Toni Gravelle, Deputy Governor of the Bank of Canada, will speak before the Windsor-Essex Regional Chamber of Commerce.
The next interest rate announcement is set for January 24 and will be accompanied by the release of the Bank’s first Monetary Policy Report (MPR) of 2024. The MPR will provide a better sense of where the Bank sees the economy and inflation heading and when the first interest rate cut might happen.
Answer to the previous trivia question: At 21% of global production, the United States was the world’s largest crude oil producer in 2022.
Today’s trivia question: Which country consumed the most crude oil last year?