It’s a Close Call Which Way the Bank of Canada Will Go

Latest News Kim Stenberg 10 Jul

Employment growth last month came in at a whopping 60,000 jobs, tripling expectations, and most of those net new jobs were for full-time workers. As our population grows, more people are available to fill job vacancies. Employment rose in wholesale and retail trade (+33,000), manufacturing (+27,000), health care and social assistance (+21,000) and transportation and warehousing (+10,000). Meanwhile, declines were recorded in construction (-14,000), educational services (-14,000) and agriculture (-6,000).

 

 

 

The unemployment rate rose 0.2 percentage points to 5.4% in June, following a similar increase (+0.2 percentage points) in May. The increase brought the rate to its highest level since February 2022 (when it was also 5.4%). There were 1.1 million people unemployed in June, an increase of 54,000 (+4.9%) in the month.

The population grew by 0.3%, the labour force rose by 0.5%, and employment increased by 0.3%. The participation rate increased by 0.2 percentage points to 65.7%.

Despite the successive increases in May and June, the unemployment rate in Canada remained below its pre-COVID-19 pandemic average of 5.7% recorded in the 12 months to February 2020.

 

One thing the Bank of Canada will be happy about is that wage inflation slowed to 4.2% on a year-over-year basis following four consecutive months of more than 5% wage growth. This is good news for the Bank, but not good enough given that wages are still rising at more than double the inflation target of 2.0%.

Bottom Line

Traders are now betting that there is a 70% chance that the Bank of Canada will hike the policy rate by 25 basis points on July 12, taking the overnight rate to 5.0%. Given that many consumers are feeling the pinch of rising prices, and the June housing data appears to have softened, at least in the GTA, the Bank could surprise us again by remaining on the sidelines. After all, inflation fell to 3.4% in May, and the Business Outlook Survey softened broadly, particularly regarding hiring intentions.

In contrast, the latest monthly GDP report showed an uptick in growth in May. Remembering that Q1 growth came in nearly one percentage point above the Bank’s forecast in the April Monetary Policy Report (MPR) and all six Canadian bank economists are forecasting a rate hike, the Bank might want to take out a bit more insurance that inflation will return to the 2% target next year.

A fresh MPR will accompany next week’s policy announcement and press conference. It’s unclear which way the Bank will go, but the odds favour a rate hike

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

May Inflation Numbers Were Good, BUT Will They Satisfy the Bank of Canada?

Latest News Kim Stenberg 27 Jun

The May inflation data, released this morning by Statistics Canada, bore no surprises. The year-over-year (y/y) inflation measured by the Consumer Price Index (CPI) at 3.4% was just as expected–down a full percentage point from the April reading. This is the smallest increase since June 2021. Economists hit this one on the head because we knew dropping the April 2022 figure from the y/y calculation would considerably lower May inflation.

By May of last year, y/y  inflation had already risen sharply to 7.7%, mainly due to dramatic energy price increases reflecting the impact of the Russian invasion of Ukraine. Inflation peaked at 8.1% in June ’22, suggesting low inflation next month as well. This is why the Bank of Canada predicted that inflation would fall to 3% by this summer.

Taking inflation down to 3% will likely be easier than the drop from 3% to 2% because the low-hanging fruit has already been harvested. Many service prices are a lot stickier than the price of commodities and durable goods.

The May inflation slowdown was primarily driven by the 18.3% y/y plunge in gasoline prices resulting from the base-year effect. Excluding gasoline, the CPI rose 4.4% in May, following a 4.9% increase in April. A drop in natural gas prices (-3.5%) also contributed to the energy price deceleration.

Prices for durable goods grew at a slower pace year over year in May, rising 1.0% after increasing 2.2% in April. The increase in May is the smallest since May 2020 and coincided with easing supply chain pressures compared with a year ago. This was reflected in furniture prices (-2.9%), which fell by the largest amount since June 2020, and passenger vehicle prices (+3.2%), which showed the smallest increase since February 2021.

Grocery prices remain elevated–up 9.0% y/y–down only one tick from April. Prices for food purchased from restaurants rose slightly faster year-over-year in May (+6.8%) than in April (+6.4%), amid ongoing elevated labour shortages, input costs and expenses, which Stats Can data show job vacancies can disproportionately affect these businesses.

Rising interest rates also boost inflation. This is because mortgage costs are just over 3% of the CPI. They are a part of the most significant component of the index–shelter–which represents almost 30% of the index. The mortgage interest cost index rose by a whopping 29.9% in May, following a 28.5% increase in April. This was the largest increase on record for the third consecutive month, as Canadians continued to renew and initiate mortgages at higher interest rates. And, of course, this does not include the effects of the policy rate hike in June.

It takes time for the full effect of interest rate hikes entirely feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed. And home-buying related expenses ticked higher in May, with higher home resale prices increasing realtor and broker commissions.

Bottom Line

Achieving the 2% inflation target will take some effort. The Bank of Canada continues to be concerned that the Canadian economy remains too hot. Although unemployment relative to job vacancies has recently started to rise, the Bank remains troubled that excess demand will continue to push some prices upward. This is the cyclical component of inflation–inversely correlated with the unemployment rate–a version the Fed calls ‘supercore’ inflation. Supercore includes household services such as haircuts, personal care, babysitting, restaurant meals, travel, accommodation, recreation and entertainment.

It is roughly the CPI-trim (which filters out extreme price movements that might be caused by severe weather and other temporary factors) minus the price of food, shelter and energy. This measure has fallen less than the other core measures. Supercore inflation is about 5.5% y/y, compared to CPI-trim at 3.8%,CPI- median at 3.9% (see the chart below).

Looking at the recent monthly trends on a three-month annualized basis, CPI-trim was at 3.8% in May, down from 3.9%, and CPI-median was at 3.6%, down from 3.8% in April.

This is why the Bank of Canada emphasizes labour market data and overall spending measures. We will get two more important Statistics Canada releases before the July 12th BoC decision: the June 30th  monthly GDP number for April and the all-important Labour Force Survey on July 7th. Unless these data show a meaningful economic slowdown or a rise in unemployment, the odds of another BoC rate hike are about 60%.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

In an Aggressive Move, the Bank of Canada Hikes the Policy Rate by 25 bps

Latest News Kim Stenberg 7 Jun

Holy Smokes, the Bank of Canada Means Business

If there were any doubt that the Bank of Canada wanted inflation to fall to 2%, it would be obliterated today. In a relatively surprising move, the Bank hiked the overnight policy rate by 25 bps to 4.75%, and an equivalent hike will follow in the prime rate. Fixed mortgage rates had already leaped higher even before today’s move as market-determined bond yields have risen in the wake of the US debt-ceiling debacle. Now variable mortgage rates will increase as well. The central bank is determined to eliminate the excess demand in the economy.

“Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target,” the bank said, citing an “accumulation of evidence” that includes stronger-than-expected first-quarter output growth, an uptick in inflation and a rebound in housing-market activity.

I had thought that the Bank would want to see the May employment data and the next read on inflation before they resumed tightening, but with the substantial May numbers in the housing market, the Governing Council jumped the gun.

The Reserve Bank of Australia did the same thing earlier this week. But their economy was already softening. On the other hand, the Canadian economy grew by a whopping 3.1% in the first quarter and is likely to surprise on the upside in Q2, boosted by a strong rebound in housing. If the correction in housing is over, then the Bank has failed to cool the most interest-sensitive sector in the economy. Governing Council fears that inflation could get stuck at levels meaningfully above the 2% target.

Bottom Line

The next Bank of Canada decision date is a mere five weeks away. While we will see two labour force surveys and one inflation report, the odds favour another rate hike before yearend. The BoC concluded in their press release that, “Overall, excess demand in the economy looks to be more persistent than anticipated.”

No doubt, if the data remain strong over the next several weeks, another 25 bps rate hike is likely in July. Deputy Governor Beaudry will flesh out today’s decision in his Economic Progress Report tomorrow.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

 

 

First Quarter Canadian GDP was Stronger than Expected Pushing the BoC Closer to Rate Hikes

Latest News Kim Stenberg 31 May

Good News is Bad News for the Bank of Canada

The Canadian economy continues to show marked resilience to high-interest rates. Statistics Canada released data this morning showing real GDP rose at an above-consensus 3.1% annual rate in the first quarter of this year. The estimate for April growth was also firm, a harbinger of continued strength in Q2. The combined drags of the public sector strike and the Alberta wildfires didn’t cause a significant downdraft.

First-quarter growth was driven by strong international trade and robust household spending. These factors were partly mitigated by slower inventory accumulation and declines in new housing construction and business investment in machinery and equipment.

After two quarters of minimal growth, household spending rose for goods (+1.5%) and services (+1.3%) in the first quarter of 2023. Expenditures on durable goods (+3.3%) were driven by motor vehicles, including new trucks, vans, and sport utility vehicles (+7.8%). Spending on semi-durables (+4.3%) was led by garments (+4.5%), while spending on non-durable goods (-0.2%) declined slightly.

Service spending picked up in the first quarter of 2023, led by food and non-alcoholic beverage services (+4.4%), and alcoholic beverage services (+6.5%). Meanwhile, travel was on the rise, with expenditures by Canadians abroad up 6.8% in the first quarter, compared with a 3.3% decrease in the previous quarter.

These data do not portend a household sector overly burdened by rising mortgage and credit card payments.

Coinciding with higher borrowing costs and slowing mortgage borrowing, housing investment fell 3.9% in the first quarter of 2023, the fourth consecutive quarterly decrease. The decline in investment was widespread—as new construction (-6.0%), renovations (-2.1%), and ownership transfer costs (-1.5%), which represents resale activity, were all down.

We know housing activity has picked up considerably since the first quarter, undoubtedly adding to Q2 growth. Also expansionary is the persistent rise in employee compensation, led by salary gains in professional and personal services, manufacturing and construction.

One warning sign is the declining household savings rates and slower disposable income. Persistently high interest rates had a predominantly negative effect on net property income, as increases in interest income (+6.4%), mainly from deposits, did not keep pace with higher interest payments on mortgages (+14.7%) and consumer credit (+10.9%).

In contrast with lower disposable income, consumption expenditures (in nominal terms) rose 2.1% in the first quarter of 2023. This was faster than the 1.4% pace recorded in the fourth quarter of 2022, partly due to inflationary pressures. As a result, the household saving rate was 2.9% in the first quarter of 2023, down from 5.8% at the end of 2022. The household saving rate approached the pre-pandemic level, which averaged 2.1% in 2019.

Business incomes fell significantly in Q1, and judging from the stock market, corporate earnings news has also been disappointing across a wide array of sectors in the second quarter.

 

Bottom Line

The strength in today’s data and the higher-than-expected inflation number for April will cause the Bank of Canada to seriously consider raising the overnight rate by 25 bps to 4.75% when they meet again next week. I think they will hold off to see the May employment and inflation data before they pull the trigger.

Markets have already responded to the numbers. Short-term interest rates remain well above levels posted earlier this year, although that is mainly about the debt-ceiling issue in the U.S. The Bank’s statement will undoubtedly be rather hawkish.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

Canadian Housing Activity Strengthens Sharply in April

Latest News Kim Stenberg 17 May

The Canadian Real Estate Association says home sales in April surged 11.3% month-over-month. The Spring rebound was on the heels of smaller back-to-back gains in the prior two months. Now that the Bank of Canada paused interest rate hikes and home prices in most regions have softened, homebuyers are scrambling for the minimal available housing supply.

Following the trend in recent months, the sales increase was broad-based but once again dominated by the B.C. Lower Mainland and the Greater Toronto Area (GTA). Toronto home sales, for example, rose by 27% m/m. That’s the most significant monthly increase over the past two decades, besides the rebound from the 2020 Covid lockdowns.

The benchmark price of a Toronto home rose 2.4% to C$1.11 million in April on a seasonally adjusted basis. The rise erased declines from earlier this year; prices are now up 0.5% year-to-date in the first four months of 2023.

 

 

 

New Listings

Housing inventory is not just low; it is extremely low, although more recent data suggest that new listings rose in the first week of May. The persistent lack of new listings is hurting home affordability.

The number of newly listed homes edged up 1.6% month-over-month in April; however, the bigger picture is that the new supply remains at a 20-year low. The number of new listings hitting the Toronto market trailed far behind the 27% increase in sales at just 2.8%. That helped shrink the supply of houses on the market, which had built up over the past year by 12.3% and left the city’s active-listings-to-sales ratio, a measure of how competitive the market is for buyers, tighter than the historical average.

And Toronto’s housing market isn’t the only one seeing tighter supply and rising prices. Vancouver, long one of the country’s most expensive markets, also saw its benchmark price rise 2.4% last month.

With national sales gains vastly outpacing new listings in April, the sales-to-new listings ratio jumped to 70.2%, up from 64.1% in March. The long-term average for this measure is 55.1%.

There were 3.3 months of inventory on a national basis at the end of April 2023, down half a month from 3.8 months at the end of March. The long-term average for this measure is about five months.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) climbed 1.6% month-over-month in April 2023 – a significant increase for a single month. It was also broad-based. A monthly price rise from March to April was observed in most local markets.

The actual (not seasonally adjusted) national average home price was $716,000 in April 2023, down 3.9% from April 2022 but up $103,500 from January 2023, a gain owed to outsized sales rebounds in the GTA and B.C. Lower Mainland.

 

 

Bottom Line

A turnaround in the Canadian housing market is in train. While inventory remains extremely low, homes are not only selling but also selling fast. Short-term fixed-rate mortgages are popular with buyers. A significant change from before the Bank of Canada started raising rates.

While the Bank will likely hold rates steady for the remainder of this year, I do not expect Macklem to cut rates before then. All of this depends on inflation. We will get another read on inflation tomorrow.

The fact that labour markets are still strong and housing activity is picking up has got to make the Bank of Canada a wee bit nervous about inflation reaching the 2% target next year.

Another noticeable thing is the continued surge in the Canadian population, thanks to immigration, has worsened the housing shortage. The supply of new housing, especially affordable housing, is inadequate for the rapidly growing population. Moreover, a recent report by the C.D. Howe Institute’s Benjamin Dachis suggests there are major governmental impediments to providing adequate housing.

The Institute recommends:

  • Enable the non-political enforcement of municipal housing policies
  • Reform the fees on new development

ease restrictions on building up and out.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

Canadian CPI Inflation Ticked Up for the First Time in Nearly a Year

Latest News Kim Stenberg 16 May

There’s been an unexpected hiccup in the Bank of Canada’s ongoing battle against inflation. Year-over-year, price pressures escalated to 4.4% in April, an uptick from the previous month’s 4.3% and significantly exceeding the average economist’s prediction of 4.1%. This marks the first rise in overall inflation from the last June. Ironically, higher interest rates are intended to tackle inflation, but rising rent prices and mortgage interest costs contributed the most to the all-items CPI increase last month.

This sketches an unusual scenario for the Bank of Canada as it approaches its June 7th rate decision. The economy remains resilient, with Canadians grappling with escalated interest rates and continued price pressures. Spring 2023 increasingly looks like the turnaround point for Canada’s housing market after a year-long slump, and labour markets remained firm in April.

To be sure, inflation is down significantly from the 8.1% year-on-year peak experienced last June. The initial reduction in inflation was swift and relatively straightforward, but predictably, the following phase is proving to be considerably more challenging.

The CPI was up 0.7% in April, following a 0.5% gain in March. Gasoline prices (+6.3%) contributed the most to the headline month-over-month movement. Excluding gasoline, the monthly CPI rose 0.5%. On a seasonally adjusted monthly basis, the CPI rose 0.6%.

Gasoline prices rose 6.3% in April compared with March, the most significant monthly increase since October 2022 and contributing the most to the acceleration in the headline CPI. This increase followed an announcement from OPEC+ (countries from the Organization of Petroleum Exporting Countries Plus) to reduce oil output, pushing prices higher. The switch to summer blend and increased carbon levies also boosted prices.
Nevertheless, gas prices were 7.7% lower in April 2023 compared with April 2022, when prices were higher due in part to Russia’s invasion of Ukraine. Compared with 18 months earlier, gasoline prices were 10.0% higher in April 2023.

Shelter costs rose 4.9% year-over-year in April after a 5.4% increase in March. Canadians continued to pay more in mortgage interest cost in April (+28.5%) compared with April 2022, as more mortgages were initiated or renewed at higher interest rates. The higher interest rate environment may also contribute to rising rents in April 2023 (+6.1%) by stimulating higher rental demand.

The year-over-year increase in the homeowners’ replacement cost index slowed for the 12th consecutive month in April (+0.2%) compared with March (+1.7%), reflecting a general cooling of the housing market.

 

Year over year, prices for groceries rose at a slower rate in April (+9.1%) than in March (+9.7%), with the slowdown stemming from smaller price increases for fresh vegetables and coffee and tea.

Bottom Line

The uptick in April inflation, especially monthly, shows that the road to 2% inflation will be bumpy. Still, the Bank of Canada will be content that their measures of core inflation continue to trend downward (see chart below). The Bank will likely continue the pause in June, but if the May employment numbers continue strong, the Governing Council will indeed warn that they will remain ever vigilant. I do not expect rate cuts this year.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

OSFI Set to Tighten Banking Regulation – Weakening Housing Markets Pose a Risk for the Canadian Economy

Latest News Kim Stenberg 24 Apr

On April 18, Canada’s national banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), released its second Annual Risk Outlook (ARO), outlining what it believes are the most significant headwinds facing the Canadian financial system – and what the regulator plans on doing about it.

According to the report, the severe downturn in real estate prices and demand following their significant rise during the pandemic was the most pressing issue. OSFI acknowledges that the housing market changed significantly over the past year, and house prices fell substantially in 2022. The regulator is preparing for the possibility that the housing market will experience continued weakness throughout 2023.

The report also highlights how the Bank of Canada’s rate hiking cycle has impacted borrowers’ ability to pay down mortgage debt, with the central bank increasing its benchmark cost of borrowing eight times between March 2022 and January 2023, bringing its Overnight Lending Rate from a pandemic low of 0.25% to 4.5% today.

Mortgage holders may be unable to afford continued increases in monthly payments or may experience a significant payment shock at the time of their mortgage renewal, leading to higher default probabilities. Given the considerable impact of real estate-secured lending (RESL) activities in the Canadian financial system, a housing market downturn remains a critical risk.

OSFI also highlights the dangers posed by more borrowers hitting their trigger rates; according to a National Bank study, eight in ten variable fixed-payment borrowers who took their mortgages out between 2020-2022 are impacted. Lenders have addressed this by extending the amortization period for affected borrowers, but OSFI says this is just a temporary solution.

Borrowers and lenders alike will need to pay the price in due course, as OSFI points out. The growth in highly leveraged borrowers increases the risk of weaker credit performance, potentially leading to more borrower defaults, a disorderly market reaction, and broader economic uncertainty and volatility.

These recent comments strengthen expectations that stricter mortgage rules could be in the cards before the year ends. Back in January, OSFI announced it was considering making tweaks to its Guideline B-20, which outlines borrowing and risk requirements for banks underwriting residential mortgages and qualification rules for borrowers, including the mortgage stress test.

OSFI may increase borrowers’ debt servicing ratio requirements, making it more challenging for those with larger debt loads to qualify for a mortgage. It is also considering limiting how many of these higher-leveraged borrowers banks can have in their portfolios, potentially leading to fewer borrowers making the cut at A-lenders and turning to the B-side and alternative mortgage market.

Finally, OSFI may change the threshold criteria for the mortgage stress test. Currently, borrowers must prove they can carry their mortgage at a rate of 5.25%, or 2% above the one they’ll receive from their lender, whichever is higher. However, following last year’s rapid rate increases, the 5.25% threshold has become obsolete, with all current market rates above 3.25%.

OSFI wrapped up consultations on these potential changes late last week and will release a report on its recommendations. Borrowers should keep an eye out for changes in the months to come.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

Canadian Inflation Falls to 4.3% y/y in March — Lowest Level Since August 2021

Latest News Kim Stenberg 18 Apr

Great News on the Inflation Front

The Consumer Price Index (CPI) fell sharply in March to 4.3% year-over-year, continuing a pattern of repeated declines. Before we break out the champagne, however, much of the drop in inflation resulted from the steep monthly increase in prices in March one year ago (1.4% m/m), the so-called base-year effects.

Gasoline prices have fallen sharply since March 2022–down year-over-year by a whopping -13.8%. This was the second consecutive month in which gas prices caused inflation to fall. The fall in gasoline prices was mainly driven by steep price increases in March 2022, when gasoline rose 11.8% month-over-month due to supply uncertainty following Russia’s invasion of Ukraine. This increased crude oil prices, which pushed prices at the pump higher for Canadians. Gasoline price inflation was transitory.

There is no question that lower inflation portends a continued rate pause by the Bank of Canada.

Inflation at 4.3% was the smallest rise since August 2021. On a year-over-year basis, Canadians paid more in mortgage interest costs, offset by a decline in energy prices.

Excluding food and energy, prices were up 4.5% year over year in March, following a 4.8% gain in February, while the all-items CPI excluding mortgage interest cost rose 3.6% after increasing 4.7% in February.

Two key yearly measures tracked closely by the central bank — the so-called trim and median core rates — also dropped, averaging 4.5%, in line with forecasts.

On a monthly basis, the CPI was up 0.5% in March, following a 0.4% gain in February. Travel tours (+36.7%) contributed the most to the headline month-over-month movement, largely driven by increased seasonal demand during the March break. On a seasonally adjusted monthly basis, the CPI rose 0.1%.

While headline inflation has slowed in recent months, having increased 1.7% in March compared with six months ago, prices remain elevated. Compared with 18 months ago, for example, inflation has increased by 8.7%.

On a year-over-year basis, price growth for durable goods slowed in March (+1.6%) compared with February (+3.4%). Furniture prices led the deceleration in prices for durable goods, falling 0.3% year over year in March, following a 7.2% increase in February. The decline was primarily due to a base-year effect, as furniture prices rose 8.2% month over month in March 2022 amid supply chain issues.

Prices for passenger vehicles also contributed to the deceleration in prices for durable goods, increasing at a slower pace year over year in March 2023 (+4.7%) compared with February (+5.3%). Higher prices for passenger vehicles in March 2022, due to the global shortage of semiconductor chips, put downward pressure on the index in March 2023.

Month over month, new passenger vehicle prices were up 1.3% in March, attributable to the higher availability of new 2023-model-year vehicles. For comparison, prices for used cars rose 0.6% month over month in March, after a 1.9% decline in February.

Homeowners’ replacement costs continued to slow in March, rising 1.7% year over year compared with a 3.3% increase in February, reflecting a general cooling of the housing market.

In contrast, mortgage interest costs rose faster in March (+26.4%) compared with February (+23.9%). This was the most significant yearly increase on record as Canadians continued to renew and initiate mortgages at higher interest rates.

There has finally been some relief in grocery price inflation. Year over year, prices for food purchased from stores rose to a lesser extent in March (+9.7%) than in February (+10.6%), with the slowdown stemming from lower prices for fresh fruit and vegetables.

Service inflation slowed to 5.1% in March. But in a sign wage pressures could be picking up, more than 155,000 federal workers are set to go on strike starting Wednesday if no deal is reached on their talks with Prime Minister Justin Trudeau’s government by Tuesday night.

Bottom Line

The Bank of Canada is no doubt delighted that inflation continues to cool. The Bank expects price gains to reach 3% by midyear and return to near their 2% target by the end of 2024. But they said getting the prices back to 2% could prove more difficult because inflation expectations are coming down slowly, and service prices and wage growth remain elevated.

Governor Tiff Macklem, speaking at the IMF and World Bank meetings in Washington recently, said the Bank of Canada is prepared to end quantitative tightening earlier than planned if the economy needs stimulation. Quantitative tightening is the selling of government bonds on the Bank’s balance sheet, which takes money out of the economy.

Macklem said his officials discussed hiking rates further during deliberations for the April 12th decision to continue to pause and reiterated that “it is far too early to be thinking about cutting interest rates.”

His comments provide a glimpse into the Bank of Canada’s strategy for shrinking its balance sheet, which ballooned to more than $570 billion during the pandemic as it bought large quantities of government bonds — to restore market functioning during the initial Covid shock and then to provide a stimulus for the economy.

The remarks show an acknowledgment among policymakers that their plans could shift if there’s a negative economic shock that requires a loosening of monetary policy.

According to Bloomberg News, swaps traders are now betting the Bank of Canada’s next move will be a cut later this year. The governor pushed back on those expectations in a press conference this week. He and his officials discussed the possibility that rates need “to remain restrictive for longer to get inflation all the way back to target.”

In a speech last month, Deputy Governor Toni Gravelle said quantitative tightening will likely end in late 2024 or early 2025. That marked the first time the Bank of Canada put a date on abandoning the program.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

 

BANK OF CANADA ANNOUNCEMENT: Holds Policy Rate at 4.5%

Latest News Kim Stenberg 12 Apr

The Bank of Canada left the overnight policy rate at 4.5%, as expected, stating their view that inflation will hit 3% by mid-year and reach the 2% target by next year. They admit, however, that demand continues to exceed supply, wage gains are too high, and labour markets are still very tight. The Bank is also continuing its policy of quantitative tightening.

“Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth. While the Bank’s Business Outlook Survey suggests acute labour shortages are starting to ease, wage growth is still elevated relative to productivity growth. Strong population gains are adding to labour supply and supporting employment growth while also boosting aggregate consumption. Housing market activity remains subdued.”

The Bank expects consumption spending to moderate this year “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly.”

“Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year. The Bank now projects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025”.

Most economists believe the Bank of Canada will hold the overnight rate at 4.5% for the remainder of this year and begin cutting interest rates in 2024. A few even think that rate cuts will begin late this year.

In contrast, the Fed hiked the overnight fed funds rate by 25 bps on March 22 despite the banking crisis and the expectation that credit conditions would tighten. This morning, the US released its March CPI report showing inflation has fallen to 5% year-over-year. Next Tuesday, April 18, Canada will do the same. The base year effect has depressed y/y inflation. Canada’s CPI will likely have a four-handle.

Fed officials next meet in early May, and it is widely expected that the Fed will continue to raise the policy rate while the Bank will continue the pause.

Due to the differences in our mortgage markets and the higher debt-to-income level in Canada, our economy is much more interest-sensitive. Despite these disparate expectations, the Canadian dollar has held up relatively well.

 

 

 

Bottom Line

The Bank of Canada upgraded its growth projections for this year in a new forecast, suggesting the odds of a soft landing have increased. This may preclude interest rate cuts this year.

“Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target,” the bank said.

The April Monetary Policy Report suggests strong Q1 growth resulted from substantial immigration. With the population proliferating, labour shortages should continue to decline, and inflation will fall to 3% later this year. The global growth backdrop is better than expected, though the Bank continues to look for a slowdown in the coming months, citing the lagged effects of rate hikes and the recent banking sector strains.

Governor Macklem said in the press conference that the economy needs cooler growth to corral inflation, although the Bank’s forecast does not include an outright recession.

The Bank will refrain from cutting rates this year. The Governor explicitly said at the press conference that market pricing of rate cuts later this year is not the most likely scenario.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

Bank of Canada Not Happy With Another Strong Jobs Report

Latest News Kim Stenberg 6 Apr

This morning’s Jobs Report was again solid. Job creation, though more tempered than in earlier months, is still robust. The unemployment rate remained at 5.0% for the fourth consecutive month. Very troubling to the Bank of Canada was the wage inflation, still above 5%.

No doubt the Bank does not welcome this news. But the jobs market is a lagging indicator, so the BoC will likely continue the pause on April 12th. DLC will host another In Conversation on that date with President, Eddy Cocciollo, and myself – stay tuned for more details.

The economy will report about 1.5% GDP growth in Q1–up from zero growth at the end of last year. Consumer spending remains strong, and the early indications suggest that the housing market is picking up and prices are rising on limited supply. As the year progresses, supply shortages will become more evident, and rent will increase sharply, making ownership more attractive.

All eyes will be on OSFI mid-month when the comment period on new initiatives end. The Department of Finance wants banks to ease credit conditions, especially for VRM (Variable Rate Mortgage) borrowers now running negative amortization. OSFI has different ideas, especially with a mini banking crisis in the US and Switzerland.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
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