Bank of Canada Forecast Fine Tuned, Easing Later but Faster in 2024
Going into the Bank of Canada meeting, it was clear that growth forecasts would be revised down and inflation forecasts revised up, and the decision to leave policy unchanged at 5.0% was as expected. However the BoC does appear increasingly confident that slowing growth will ease inflationary pressures, despite continued concerns over inflation’s persistence. We now expect 100bps of easing in 2024, to 4.0% at the end of the year, rather than 75bps as we previously expected, but with easing starting in Q3 rather than Q2.
The BoC’s updated view
The BoC stated that there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures. There can be little doubt over the first conclusion given recent GDP data, but that the BoC felt able to make the second conclusion is notable. The BoC goes on to state that supply and demand ae now approaching balance.
The economic forecasts in the BoC’s Monetary Policy Report were in line with our expectations. GDP is seen weak through the next year before increasing in late 2024 and 2025, with the 2025 view stronger than we expected. The BoC expects CPI to average about 3.5% through mid-2024 before gradually easing to the 2% target in 2025. The BoC’s comments on inflation are mixed, seeing higher interest rates moderating goods inflation and this spending to services, but also noting persistent strength in wages and a lack of downward momentum in the BoC’s core inflation measures.
With the statement reiterating that the BoC is prepared to increase the policy rate further a tightening bias remains, but the tone of the statement suggest that it will need activity data to regain momentum as well as persistent inflation to have the BoC tightening again. Easing appears quite distant, and is likely to require clear signs that inflation is slowing. That the BoC expects inflation to remain around 3.5% through mid-2024 suggests easing will start in the second half of that year.
Our forecast fine-tuned
With the subsequent press conference having a slightly less dovish tone than the statement, with Governor Tiff Macklem stating that inflationary risks have increased, this meeting does not appear to have changed much. We have however fine-tuned our Bank of Canada rates forecast. We now expect the BoC to hold rates through Q2 2024 rather than starting easing in that quarter, but we expect the BoC to move a little faster once it starts easing, with 50bps of easing in both Q3 and 2024, leaving rates at 4.0% at end 2024 when we had previously expected only 75bps of easing in that year. Given that growth is seen picking up in 2025 we expect the BoC to ease by only 25bps per quarter in that year, leaving rates at 3.0% at the end of the year, as we had previously expected. While GDP is likely to pick up in 2025, we suspect the BoC’s 3.0% Q4/Q4 forecast is too high.