October 26th 2023
Interest Rates
pause, meeting economist expectations amid a slowdown in the economy. The bank said there is growing evidence higher interest rates are cooling the Canadian economy and noted easing demand for housing, goods and services and business investment in its statement accompanying the decision . “Signs of flagging demand were reason enough for the Bank of Canada to keep its target rate on hold,” Avery Shenfeld, chief economist at CIBC Capital Markets, said. However, with inflation still above target, Shenfeld noted the bank wasn’t ready to declare its job over in getting inflation to two per cent. The bank warned it could hike interest rates again if “inflation expectations, wage growth and corporate pricing behaviour” don’t moderate. “Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed,” the bank said. The bank also noted that its preferred measures of core inflation remain above target at 3.7 per cent and 3.8 per cent year over year. “The bank is clearly frustrated by the achingly slow (but entirely predictable) descent in inflation,” Douglas Porter, chief economist at BMO Economics, said. Here’s what economists say about the Bank of Canada hold and where rates could go from here. Avery Shenfeld, CIBC Economics “Signs of flagging demand were reason enough for the Bank of Canada to keep its target rate on hold at five per cent today, but with inflation still well above target, it’s not yet willing to give up on its warning that further hikes could still be in the offing if prices don’t see enough cooling ahead. Both decisions should come as no surprise to markets today. The statement cited ‘growing evidence that past interest rate increases are dampening economic activity,’ and its 0.9 per cent forecast for 2024 growth (revised down from 1.2 per cent) implies another few quarters of only sluggish gains ahead. But it also is concerned about what it sees as ‘little downward momentum’ in core inflation. It’s raised the near term inflation projection somewhat due to energy prices but also due to the lack of core inflation progress, but the fact that it’s not hiking in response to that suggests that it’s willing to show some patience while they wait for economic slack to bring inflation down to two per cent in 2025. Of interest, the nominal neutral rate is still seen as two to three per cent, while the output gap has been revised down, and is seen as slightly negative as of Q3. We expect that more of that momentum on inflation will show up as that slack grows in subsequent quarters, and therefore don’t expect to see additional rate hikes ahead, and room to ease as we approach mid-2024.” Stephen Brown, Capital Economics “Although the Bank of Canada maintained its tightening bias today, the rest of the policy statement suggests that the bank is growing more confident that its job is done. We continue to expect the bank to cut interest rates by much more than markets are pricing in next year. We see scope for headline inflation to return to the two per cent target in the third quarter of 2024, a full year before the bank anticipates. That is partly because, in contrast to the bank’s view that the economy will avoid recession, we judge that we are already in the opening stages of one. We see scope for the bank to begin cutting interest rates from around April 2024, taking the policy rate back to three per cent by the end of the year.” James Orlando, TD Economics “Although the Bank of Canada has painted a clear picture for why it doesn’t need to hike again, we expect its hawkish rhetoric to persist. It needs to maintain current tight financial conditions in order to achieve its forecast slowdown. And while markets are hesitant to build in another hike, the impact of the bank’s rhetoric has resulted in a higher for longer path for its policy rate.” Douglas Porter, BMO Economics “We have long believed that fiver per cent rates are plenty high enough to eventually quell underlying inflation, but it will take time and patience. Strong wage growth and firm core inflation trends are going to test the bank’s patience. However, all signs suggest that the economy is struggling mightily to grow — despite the artificial sweetener of a surging population — with Q3 GDP about flat, housing halting, consumer confidence crumbling, and the Business Outlook Survey pointing south. Still, price and wage growth remain too fast for the BoC to back off its hawkish rhetoric just yet. To act on that hawk talk would take either a big rebound in growth, a renewed acceleration in inflation, or perhaps a considerably weaker Canadian dollar. We assume none of those forces will weigh in, and look for the bank to remain on hold deep into 2024