The Bank of Canada kept its policy rate unchanged at 5% for the fifth time in a row as it continued to wait for inflation to further moderate.
Canada is in the home stretch in its path to price stability. It will be a few more months before the first rate cut, which we expect to occur in June.
There are ample signs that monetary policy is working. January’s headline inflation number fell below 3% as all core inflation measures fell.
Excluding shelter, inflation is at 2%. Goods inflation has fallen below 2%, and even services inflation is falling.
But the Bank of Canada exercised cautious optimism in announcing its decision on Wednesday. While growth in the fourth quarter exceeded expectations and Canada avoided a technical recession, the Bank of Canada stressed that growth is below potential.
The economy has weakened considerably. Job growth is below population growth, which means the unemployment rate is expected to keep ticking up. Business hiring and investments have basically come to a halt in a restrictive rate environment.
At the same time, there are lingering risks to inflation. Housing remains the most challenging part, which is beyond the central bank’s scope alone to fix. While growth is projected to be weak for the rest of the year, it is still positive, meaning that the central bank has time to wait for disinflation to become baked in the economy before cutting rates. The central bank also continued its balance sheet reductions, known as quantitative tightening.
Read more of RSM Canada’s insights on the economy and the middle market.
Nevertheless, more disinflation is on the horizon. At home, a cooling labor market means that wage growth will also ease in the upcoming months. As consumers cut spending because of high housing costs, businesses will have to limit price increases.
Abroad, China is exporting a glut of consumer goods, and, in the process, disinflation to the world. China’s deflation will put further downward pressure on consumer prices in Canada.
