Bank of Canada to Hold Rates on October 25, Won’t Signal Rates Have Peaked
The Bank of Canada meets on October 25 and with activity showing clear signs of having slowed but inflation still too high, will debate whether further tightening is needed. While we expect rates to remain unchanged at 5.0%, it is a close call and the BoC will warn that more may be needed if slowing activity fails to deliver further progress on inflation.
A quarterly Monetary Policy Report is due at the meeting. This will confirm that Q3 GDP at -0.2% annualized significantly underperformed a 1.5% forecast made with July’s MPR, and that Q3 CPI, averaging 3.7% yr/yr, significantly exceeded July’s 3.3% projection. Q3 GDP appears to be tracking below a 1.5% projection made in July, though we do not expect the BoC to project another negative, either in Q3 or Q4. We do not expect large changes to 2024 forecasts, but we expect CPI to be revised up to 2.4% Q4/Q4 from 2.2% and GDP to be revised down to 1.3% Q4/Q4 from 1.5%.
The last BoC statement on September 6 saw rates left unchanged with the BoC noting evidence of excess demand easing and the lagged effects of monetary policy, but they remained concerned about the persistence of underling inflationary pressures and were prepared to increase the policy rate further if needed. This meeting is likely to deliver a similar message.
On October 13 Governor Tiff Macklem stated the BoC would consider tightening at this meeting, and in a remark more hawkish than what we have recently been hearing from the Fed, stated that higher long term rates were not a substitute for policy action. The BoC’s Q3 business outlook survey showed persistent, if slower, inflationary pressures, while Q3 consumer expectations for inflation saw little change. A softer September CPI after two straight disappointing months probably allows the BoC to pause again, in the hope that softer activity will bring more subdued inflationary data in Q4. However the BoC’s tightening bias will persist.