Bank of Canada Preview: Close Call For a 25bps Tightening
The Bank of Canada meets on July 12 and the decision looks like a close call between no change and a 25bps tightening, to 5.0%. We now believe the balance has shifted marginally to the latter. The BoC is likely to conclude that one more tightening is likely to be needed, and if it makes that conclusion it may see no good reason to wait. We believe that once rates reach 5.0%, the BoC will hold rates there for the rest of the year.
After tightening by 425bps to 4.50% in the 12 months to January 2023, the BoC paused at its March and April meetings, before resuming tightening with a 25bps move in June. The statement released in June noted stronger than expected data from both growth and inflation and concluded that policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.
At this meeting the BoC will ask itself how restrictive policy needs to get and how quickly it needs to get there. At this meeting the BoC will produce its quarterly Monetary Policy Report, and we expect its end 2023 views for Q4/Q4 GDP and CPI growth will both be around 0.5% higher than they were in April. We expect the GDP view to be raised to 1.6% from 1.1% and the CPI view to be raised to 3.0% from 2.5%. This would assume some slowing in GDP, though not a recession, in the second half of the year, but only limited progress on CPI where core measures remain stubbornly high.
Moving both growth and inflation forecasts up by 0.5% would appear to justify rates moving 0.5% higher than where they were in April, meaning that after the 25bps June tightening a 25bps July move would complete the necessary adjustment. While the Fed is currently moving more slowly as it approaches its expected end point, the BoC has tended to move quickly once it decides what needs to be done, most notably moving by 100bps in July 2022. If at this meeting the BoC decides to tighten the statement is unlikely to suggest that further tightening is likely, but it will make it clear that it is prepared to move again if data exceeds its expectations.
Data released since June’s meeting has not been conclusive, with May’s CPI a little less alarming than an unexpected acceleration on April and the BoC’s quarterly business and consumer surveys showing some progress on inflation expectations, but inflation and expectations remain clearly too high. An unchanged April GDP outcome was weaker than expected but depressed by a public sector strike with preliminary expectations for May suggesting the economy still has some momentum. That April retail sales exceeded expectations is significant given that the June BoC statement noted unexpected strength in Q1 consumer spending, as are stronger home sales in the year to date through May.A mostly positive tone to US economic data further adds to the case for BoC tightening.
June employment data from both the US and Canada due on July 7 will however be watched, particularly the latter with Canada’s May employment report, released after June’s BoC decision, having surprised to the downside. With the July BoC call close, employment data could still change the balance of risks.
I,Dave Sloan, the Senior Economist declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.