Bank of Canada Drops Threats of Hikes, Shifts Discussion To Cuts

Canada’s central bank held rates as widely expected, but still surprised. Bank of Canada (BoC) announced they’ll continue to hold the overnight rate at 5.0%, along with continued quantitative tightening (QT). It was believed the central bank would be hawkish, hoping to avoid a repeat of last year that sent inflation (and rates) even higher. That wasn’t the case, as the BoC Governor dropped threats of rate hikes, and revealed the council is now focused on when to cut rates. 

Higher Rates Are Cooling Inflation, But It’s Still Too Damn High

The central bank boasted of progress on inflation, but warned it hasn’t cooled enough. Headline CPI climbed to 3.4% in December, accelerating from a month before. The BoC-preferred CPI Core, which excludes volatile components, also climbed to 3.7% over the same period. Both numbers remain much higher than the target rate of 2% the central bank considers stable. 

“While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behavior- continues to normalize, core measures of inflation are not showing sustained declines,” said BoC Governor Tiff Macklem.  

BoC Sees Inflation Back To Target 3 Years After Initially Expected

Higher rates are working but how long will it take to get back to target? The BoC anticipates CPI will fall to 3% annual growth by mid-year, but won’t hit its 2% target until 2025. That’s about 3 years past its initial forecast, but this time they’re probably right. 

“… inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work,” warned Macklem. 

Bank of Canada Drops Discussion of Hikes, Shifts To Cuts

No change to rates was widely anticipated but the BoC shifting its narrative wasn’t. Notably absent from the Governor’s speech was the mention of raising rates if needed. Instead, they said the BoC’s leadership is now discussing the exact opposite. 

“…with overall demand in the economy no longer running ahead of supply, the Governing Council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level.” 

Virtually no institution is forecasting higher interest rates, but discussing cuts is unexpected. This time last year, the Governor made a similar mistake by overtly communicating that rate hikes were over. It sparked a buying spree that ultimately forced the central bank to hike rates twice more.

By repeating the same message, the Governor is demonstrating he doesn’t see a repeat. That means he likely sees the economy as much weaker than it was this time last year. Something other analysts have called, but a position the BoC hasn’t officially adopted yet.

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