Bank of Canada Keeps Policy Rate on HoldIn case you missed it....
Bank of Canada Keeps Policy Rate on Hold, Continues QT; Ready to Hike Rate If Needed to Bring Inflation to The 2% Target
10:10 AM EST, 03/08/2023 (MT Newswires) -- The Bank of Canada (BoC) Wednesday held its target for the overnight rate at 4.5%, with the Bank Rate at 4.75% and the deposit rate at 4.5, adding it's also continuing its policy of quantitative tightening (QT).
Global economic developments have evolved broadly in line with the outlook in the January Monetary Policy Report (MPR), said Canada's central bank in its policy statement. Global growth continues to slow, and inflation, while still too high, is coming down due primarily to lower energy prices.
In the United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January. In particular, labor markets remain tight, and elevated core inflation is persisting. Growth in China is rebounding in Q1. Commodity prices have evolved roughly in line with the BoC's expectations, but the strength of China's recovery and the impact of Russia's war in Ukraine remain key sources of upside risk. Financial conditions have tightened since January, and the US dollar has strengthened, it noted.
In Canada, economic growth came in flat in Q4 2022, lower than the BoC projected. With consumption, government spending and net exports all increasing, the weaker-than-expected gross domestic product (GDP) was largely because of a sizeable slowdown in inventory investment. Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and international demand, said BoC.
The labor market remains very tight. Employment growth has been surprisingly strong, the unemployment rate remains near historic lows and job vacancies are elevated. Wages continue to grow at 4% to 5%, while productivity has declined in recent quarters.
Inflation eased to 5.9% y/y in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians. With weak economic growth for the next couple of quarters, pressures in product and labor markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.
Overall, the latest data remains in line with the BoC's expectation that consumer price index (CPI) inflation will come down to around 3% y/y in the middle of this year. Year-over-year measures of core inflation ticked down to about 5%, and three-month measures are around 3.5%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.
In its January decision, the Governing Council (GC) indicated that it expected to hold the policy interest rate at its current level, conditional on economic developments evolving broadly in line with the Monetary Policy Report (MPR) outlook. Based on its assessment of recent data, GC decided to maintain the policy rate at 4.5%.
QT is complementing this restrictive stance. GC will continue to assess economic developments and the impact of past interest rate increases and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The BoC remains resolute in its commitment to restoring price stability for Canadians, it added.