Kevin Carmichael: Bottom line — those who like the central bank to hold their hands will be disappointed
Published Mar 08, 2023 • Last updated 10 hours ago • 4 minute read
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Bank of Canada governor Tiff Macklem. Photo by REUTERS/Patrick Doyle The Bank of Canada kept its promise and stopped raising interest rates.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Governor Tiff Macklem ended the latest round of policy deliberations with a decision to leave the benchmark rate at 4.5 per cent, a setting that is four percentage points higher than this time a year ago after the most aggressive series of rate increases in the central bank’s history.
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Bay Street anticipated the decision. The central bank said in January — while raising its rate another quarter percentage point — it would consider pausing in March if it was confident that inflation was easing. The data since the start of the year indicates that’s the case for now.
“The latest data remains in line with the bank’s expectation that (consumer price index) inflation will come down to around three per cent in the middle of this year,” the Bank of Canada said in a statement on March 8.
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Article content Headline inflation — as measured by year-over-year increases in the consumer price index — has slowed to about six per cent from a peak of around eight per cent during the summer.
That’s still a long way from the Bank of Canada’s target of two per cent. However, Macklem is sensitive to the possibility that he might have raised interest rates faster than the country’s debt-addled households can handle.
Statistics Canada said its gauge of mortgage interest costs surged 21.2 per cent in January from a year earlier, the biggest increase since September 1982. It’s one example of how higher debt-servicing costs are consuming more of households’ disposable income, destroying demand for goods and services.
Typically, central banks lift interest rates slowly and methodically. But Macklem decided the threat of runaway inflation over the longer term was greater than the near-term risk of triggering a recession, so he raised borrowing costs more aggressively than his international peers. That means that as the United States Federal Reserve and the European Central Bank signal they are planning more interest rate increases, the Bank of Canada has moved to the sidelines.
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Article content The contrast with what’s happening elsewhere will feed questions about whether the Bank of Canada is finished or simply taking a break. Bloomberg News this week reported that the prices of financial assets tied to short-term interest rates imply that investors anticipate another increase by the Fed before year-end. Fed chair Jerome Powell rattled financial markets on March 7 by telling lawmakers bluntly that he would be lifting borrowing costs again.
Could conditions in Canada be so different than those in the U.S. and Europe? The Bank of Canada thinks it’s possible. Economic growth stalled in the fourth quarter, sooner than the central bank predicted. The bet is that weaker demand will outweigh the forces that continue to exert upward pressure on prices.
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Article content “With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease,” the Bank of Canada said. “This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.”
There were no declarations of victory in the statement, however.
Macklem has said several times this year that he’s more worried about being wrong on inflation than he is about inadvertently causing a shallow recession. That means interest rate increases will remain on the table even as evidence shows the economy is slowing. Notably, the central bank didn’t signal where inflation could be headed at the end of the year, only that it thought year-over-year increases were on track to slow to three per cent by midyear.
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Article content There are reasons to worry that inflation could get stuck at three per cent, given expectations of stronger growth in China and the Russian invasion of Ukraine, both of which could ignite a resurgence in commodity prices. That could prompt the Bank of Canada to resume raising interest rates since Macklem has said he’s determined to get back to target.
Surprisingly strong hiring is also a worry, albeit a counterintuitive one. Policymakers characterized the labour market as “very tight,” which suggests demand could continue to be a source of inflation because suppliers of goods and services still appear to be struggling to keep up. That means new employment data on March 10 could influence expectations for interest rates over the rest of the year.
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Article content “Employment growth has been surprisingly strong,” the Bank of Canada’s statement said. “The unemployment rate remains near historic lows, and job vacancies are elevated. Wages continue to grow at four per cent to five per cent, while productivity has declined in recent quarters.”
Bank of Canada holds interest rates: Read the official statement Kevin Carmichael: Slower inflation means the Bank of Canada’s ‘March break’ is back on Tiff Macklem is sticking with rate-hike pause despite blowout jobs report — for now Bottom line: those who want the Bank of Canada to hold their hands will be disappointed. Given the January pledge to pause, it would have taken a lot for the central bank to go back on that promise less than two months later. There will be no such constraint next time. The April 12 decision will be contingent on evidence that inflationary pressures continue to recede.
• Email: kcarmichael@postmedia.com | Twitter: CarmichaelKevin