- Governor Tiff Macklem sees tightening from global banking stress as a key influence on the Bank of Canada’s (BoC) interest rate policy
- Such tightening may lead to dovishness, though the central bank remains willing to hike its policy rate based on economic performance
- Canadian inflation accelerated to 4.4 per cent YoY in April from 4.3 per cent in March, the first increase since June 2022
- Analyst consensus sees a pause at the BoC’s next decision on June 7
Governor Tiff Macklem sees tightening from global banking stress as a key influence on the Bank of Canada’s (BoC) interest rate policy.
On Thursday, he spoke at the Toronto Region Board of Trade about the BoC’s openness to hiking rates again, contingent on financial stresses expediting the central bank’s 2-per-cent inflation target.
“If financial stress were to lead to more tightening than expected and if this were to persist, we would need to take this into consideration as we set the policy rate to achieve our inflation target,” Macklem said.
Canadian inflation accelerated to 4.4 per cent YoY in April from 4.3 per cent in March, the first increase since June 2022. On a monthly basis, the index rose 0.7 per cent, surpassing expectations of a 0.4-per-cent gain.
Trim and median core rates decelerated to an average 4.2 per cent from 4.45 per cent last month, matching expectations. That said, the measures’ three-month moving averages ticked up.
Service inflation fell to 4.8 per cent in April, down from 5.1 per cent in March.
Jobs data from May 5 featured the longest stretch of monthly job gains since 2017, with wages adding more than 5 per cent for a third straight month.
Higher April rent prices (up 6.1 per cent) and mortgage interest costs (up 28.5 per cent) were the primary drivers of the higher YoY Consumer Price Index (CPI) reading, while gas prices – up 6.3 per cent, the largest monthly increase since October 2022 – represented the bulk of the headline month-over-month gains due to global output reduction, the switch to summer blend and an increase in carbon levies.
Macklem was adamant during his speech that it is “too early to really be thinking about interest rate cuts,” observing that upside risks remain the chief concern. “If we start to see signs that inflation is likely to get stuck materially above our 2 per cent target,” he added, “we are prepared to raise rates further.”
Besides banking system stress, the BoC will be closely monitoring employment and wage growth, service inflation, corporate pricing and inflation expectations to institute future rate policy.
Officials expect the CPI to reach 3 per cent by midyear and return to approximately 2 per cent by the end of 2024, though slowly descending inflation expectations and elevated service price inflation and wage growth are acting as headwinds that may delay the forecast.
Analyst consensus sees a pause at the BoC‘s next decision on June 7.
Last month’s unexpected rise in inflation suggests that investors could benefit from companies that prioritize cash flow and profitability, as opposed to revenue growth, allowing for greater stability through a bearish consumer sentiment environment.
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