Canadian BoC Rate Decision 5.00% vs. Exp. 5.00% (Prev. 5.00%); drops October language re. inflationary risks increasing, reiterates prepared to hike if needed

Policy

• Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.

Economy

• Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%.


• Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.

Inflation

• Shelter price inflation has picked up, reflecting faster growth in rent and other housing costs along with the continued contribution from elevated mortgage interest costs.


• In recent months, the Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.

via BoC

Analysis details (20:32)

Summary 

The BoC left rates unchanged at 5.00% as expected, while it made some tweaks to its statement with both hawkish and dovish tones. On the dovish side, it started to show some of the impacts rate hikes are having by noting "higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year”. The statement also noted the Q3 GDP contraction, the easing labour market, and noted that the economy is no longer in excess demand. It also dropped the line that progress toward price stability is slow and inflationary risks have increased. However, on the hawkish side, it maintained its view that it is concerned about the risks to the outlook for inflation and it also maintained its guidance that it is prepared to raise the policy rate further if needed. However, with price growth easing and economic growth slowing, markets still largely expect that the BoC is done with rate hikes, and BoC Governor Macklem in a recent speech had also suggested policy may now be restrictive enough. By maintaining guidance the BoC will be prepared to raise rates further if needed, helping to keep inflation expectations anchored, but with slowing growth the demand side of the equation should keep prices anchored. Attention now is turning to the easing cycle, the decision today saw little reaction to money market pricing and markets are still pricing in c. 110bps of easing in 2024 with the first cut fully priced by April. It is unlikely we will get any guidance on rate cuts shortly, with Macklem recently noting now is not the time to be talking about rate cuts, plus the BoC would be cautious over any rising inflation expectations if the consumer starts to expect rate cuts. The December meeting was a statement-only affair but Deputy Governor Gravelle's has a speech on December 7th. Looking ahead, analysts at Oxford Economics believe that further rate hikes are unnecessary and expect the BoC to hold rates until mid-2024. 

06 Dec 2023 - 15:00- Fixed IncomeData- Source: Reuters