As expected, the Bank of Canada on Wednesday maintained its policy rate at 5 per cent and continued its restrictive monetary policies. At the same time, though, its public statements signed a more dovish tone.
In softening its rhetoric, the central bank noted the slowdown in the global and domestic economy. The Canadian economy, in particular, has come to a standstill, and is likely to stay there until the Bank of Canada eases its restrictive monetary policies.
Even though the central bank might hold its policy rate steady until June, we think it should adopt a 25 basis-point rate cut in April given the deteriorating economic conditions.
Across the economy, disinflationary forces are emerging as a result of the central bank’s restrictive policies. Consumers have tightened their purse strings in response to high interest rates. Similarly, businesses have pulled back on their investments and spending.
Globally, Europe might already be in a contraction, and the debt crisis in China is hobbling its economy. Slow global demand translates to disinflation.
Wage growth in Canada remains in the 5 per cent range, way above the Bank of Canada’s comfort level, but job vacancies are returning to pre-pandemic levels and the labour market is softening. Wage growth should moderate in the upcoming months.
Read more of RSM Canada’s insights on the economy and the middle market.
The tricky part is shelter inflation—the biggest contributor to above-target inflation. The housing shortage will not be solved overnight, but easing interest rates will provide some relief to mortgage holders and could ease the growth in shelter prices.
The takeaway
The Bank of Canada will cut rates only when it is confident that inflation has receded sufficiently to allow for a return to price stability. Given weak growth at home and abroad and an economy in moderate excess supply, more disinflation seems to be in store.
